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Moore et al. point out that the entire reason that the market regresses toward the mean in its valuation of gorillas, chimps, and monkeys is because the PEs of the gorillas look silly compared to the PEs of the other animals in the jungle.


I don't understand your point at all, especially because Moore goes into great detail to explain why the valuation of gorillas and all companies thriving on a network effects-based business model regresses to the extreme, not the mean.

--Mike Buckley

We are both correct. I was talking about how the market temporarily undervalues gorillas whereas you are talking about how gorillas get valued in the end.

From page 119:

"But if investors are ever going to beat the market, then at some point they have to know something that the market does not know. In the case of the gorilla game this knowledge consists of two components:

1. The stock market will underestimate the returns that a gorilla can earn in a tornado market because the GAPs are so deviant from those of market leaders in other sectors.

2. The market will underestimate the duration of the Competitive Advantage Period because their CAPS are so deviant from those of market leaders in other sectors.

Of course, eventually the market will catch itself making these mistakes and correct matters."

Now, the regression to the mean point I was trying to make from p. 127.

"2. In the short term, however, the stock market is not good at pricing the stocks of companies in tornadoes or the stocks of gorillas on Main Street. In both cases the correct valuation appears drastically overvalued. So instead, investors price these companies "closer to the mean."


"And because it does not anticipate the persistence of the gorilla's competitive advantage going forward onto Main Street, it persists in underpricing the gorilla relative to the chimps and monkeys, again until very late in the game -- usually only after one or more chimps have died off. This double dose of persistent underpricing provides the foundation of the gorilla game."

Bottom line: confusion re short term vs. long term valuation of gorillas.
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