Starting Points Matter: What Valuations Are Signaling and How I Am Positioned
Investor Letter
Dear Investors,
When I was a child growing up in a small village in India, there was a local shop that used one of those old-fashioned weighing scales with metal weights. From a distance the scale always looked balanced. The shopkeeper moved with such quiet confidence that nobody questioned it. The vegetables went on one side, the weight on the other and the beam settled in that familiar, reassuring way.
But if you stood close, you could see something else.
The needle never quite aligned with the proper mark. The balance looked convincing, but the measurement was slightly inflated. Most people never noticed because the movement of the scale felt normal and the shopkeeper looked like he knew exactly what he was doing.
The market today feels similar to that scale.
On the surface everything looks steady. Credit spreads are calm. Companies sound confident. Volatility barely moves. From a distance you could believe the system is healthy and in good order.
But when you check the reading that matters, which is the price of the market relative to the actual output of the economy, the number is quietly stretched. The Buffett Indicator captures that. The surface is calm, but the weight is off.
This is not a forecast of panic. It is simply recognition that you can overpay without realising it, especially when everything looks normal.
A Simple Way to Think About Valuation
I often return to a basic picture.
A farm, a harvest and a buyer.
A farm produces a fixed amount of wheat each year. You can admire the land and believe in its potential, but the crop is the crop. If you pay a sensible multiple of the harvest, you are likely to earn a sensible return. If you convince yourself the farm is extraordinary and pay fifty or one hundred times the harvest, nothing about the farm changes. Only your return does.
This is exactly how valuation works at the market level.
When price runs too far ahead of output, future returns narrow.
Where the Indicator Sits Today
It helps to attach real numbers to this rather than keep it abstract.
As of late 2025, the total value of the United States stock market sits at roughly 220 to 223 percent of GDP. In simple terms, the market is priced at more than twice the size of the economy that supports it.
For most of modern market history, that ratio lived closer to 80 to 120 percent.
Those levels tended to coincide with long-term returns that were fair and grounded in what the economy could reasonably deliver.
Once the ratio moves above one hundred sixty percent, the pattern across decades is consistent. Forward returns weaken, not because anything breaks, but because investors begin too far above what the underlying economy can justify.
This metric does not tell us when conditions will shift.
It tells us what future returns are likely to look like when the entry point is this high.
A market that trades at more than twice the size of its economic output is one that has already consumed a meaningful portion of tomorrow’s returns today.
Why Strong Current Data Does Not Cancel This
Two talking points are often used to justify today’s valuations.
Credit metrics are improving.
Corporate guidance is rising.
Both are true, but neither relates to valuation.
Credit is a backward-looking marker. It tells you the recent past was calm. It does not tell you what is priced into the future. A quiet fire station does not mean the town is safe.
Guidance is similar. Companies sound most confident when conditions are strong and margins are wide. Their confidence reflects the moment, not the valuation.
Good conditions now do not guarantee good returns from this price.
A Practical Example of Valuation Leaving Reality
Every cycle produces a company that investors decide does not need to follow basic arithmetic.
This cycle has Palantir.
Some argue that one hundred times sales is reasonable because the business is unique.
One hundred times sales means something simple.
If Palantir handed over every dollar of revenue for the next one hundred years, without any expenses or reinvestment, investors would only break even in 2125.
A more tangible example makes it clear.
Imagine a town with a bakery known for exceptional bread. The baker works hard and people queue every morning. The bakery dominates locally. Now imagine the town decides that buying the bakery for one hundred years of revenue is fair. Then imagine the assistants behind the counter, not even the baker, being awarded equity packages worth more than the bakery will reasonably produce for years.
In any normal setting, you would call that mispriced.
That is the situation with Palantir.
Mid-level employees now sit on RSU packages exceeding twenty-five million dollars. The business is not producing that value. The valuation environment is.
The lesson is not about Palantir.
It is about how easily narratives override numbers when the surface feels calm.
A Real-Time Reminder: Figma and Adobe
Figma’s IPO offered a useful example of how valuation can overpower fundamentals, even when the underlying product is genuinely strong.
In my view, Figma is a far superior product to Adobe’s comparable tools.
It is modern, intuitive and the preferred choice for many designers. The collaboration layer creates genuine network effects that Adobe has never truly managed to replicate. If you gave both companies a blank sheet of paper and asked them to build a design platform from scratch, most people would likely bet on Figma.
Yet the market behaved exactly as it always does when a great company meets the wrong valuation.
Figma fell nearly sixty-eight percent within months of listing.
Adobe fell roughly five percent.
The outcome had nothing to do with product quality or competitive strength.
It had everything to do with valuation.
Even a company with a better product and real network effects cannot outrun the gravity of an overstretched multiple. When a price assumes too much of the future, any normal adjustment in expectations can overwhelm the fundamentals.
Figma remained a strong product.
Its valuation did not.
A good business can still be a poor investment at the wrong price.
What History Repeats When Starting Points Are High
Across cycles, the pattern is consistent.
When valuations begin at elevated levels:
future returns shrink
downside asymmetry increases
sensitivity to rates rises
small disappointments create outsized reactions
multiple compression happens even without recession
Nothing dramatic needs to occur.
The problem is the entry point.
Valuation behaves like gravity.
Slow, consistent and eventually decisive.
How I Position When Markets Are Calm but Prices Are Not
When valuations stretch and nothing feels urgent, I simplify the process.
1. Would I buy this today at this size
If the answer is not a confident yes, I trim or exit.
2. Anything above ten times sales is treated as a trade, not a core
Either the evidence is exceptional or the position stays small.
3. Cash equals optionality
If I would not feel ready to deploy capital after a sharp decline, liquidity increases.
4. Familiarity is not a thesis
If I cannot explain in one sentence why a position deserves to remain, it leaves the portfolio.
5. The regret test
If the market fell tomorrow, which positions would I wish I had reduced. Those are reduced now.
This keeps the portfolio aligned with reality rather than mood.
Closing Thoughts
The Buffett Indicator is not predicting a crisis.
It is signalling that the future has already been priced more expensively than usual.
Strong credit, firm guidance and quiet volatility do not override valuation gravity.
They simply make it easier to overlook.
When you pay too much for the world as it stands, the world does not need to deteriorate for returns to weaken.
It only needs to continue.
One personal note.
Recently the market has felt uneventful to me. Boring, even. Earlier in my career I might have taken that as a reason to search for something new. I see it differently now.
Boredom usually means I am not forcing trades, not chasing stories and not inventing activity for its own sake.
It is often the first indication that discipline is doing its job.
My focus remains the same.
Stay selective.
Stay clear.
Stay disciplined.
Sincerely,
Neel