There is a moment in every market cycle where logic quietly leaves the room, shuts the door behind it, and leaves a note that says, “I’ll be back when this blows up.” That moment is when investors stop asking whether a stock is expensive and start asking whether they’ll feel worse missing it.
This is the birth of what we might call the P/E Ratio of Regret—the psychological multiple that replaces valuation when prices feel justified not by fundamentals, but by fear of being left behind.
You know the moment. The stock has already doubled. Analysts are raising price targets with straight faces. Financial media explains that this time is different using the same cadence they used last time, which was also different, until it wasn’t. Your portfolio looks underdressed compared to your neighbor’s returns. And suddenly, a stock trading at 45x earnings doesn’t look expensive anymore—it looks necessary.
This is not because valuation stopped mattering.
It’s because regret became the dominant risk metric.
Valuation Doesn’t Break—It Gets Reinterpreted
The price-to-earnings ratio is one of the oldest tools in investing. Simple. Elegant. Brutally unforgiving over long periods of time. At its core, it answers a very basic question:
How much are you paying today for a dollar of earnings?
But during late-cycle enthusiasm, the question subtly changes:
How much am I willing to pay to avoid feeling stupid later?
Once that shift happens, the P/E ratio stops being a valuation tool and becomes a storytelling device.
High multiples are no longer red flags. They’re signals of quality. A stock isn’t expensive—it’s premium. Earnings aren’t insufficient—they’re temporarily constrained. Risks aren’t ignored—they’re fully understood and therefore irrelevant.
This is how markets don’t collapse suddenly. They float upward on increasingly creative explanations until gravity reasserts itself.
Why “It’s Still Cheap” Is Always the Last Sentence Before the Turn
There is a specific phrase that shows up near every major market top:
“It’s still cheap.”
Not cheap relative to history.
Not cheap relative to cash flows.
Not cheap relative to alternative investments.
Cheap relative to the future story.
At this stage, valuation arguments stop being backward-looking and become speculative forward projections stacked on top of optimistic assumptions. Earnings five years out are capitalized as if they’re guaranteed. Margins are assumed to expand forever. Competition politely disappears from the model.
The problem isn’t optimism. The problem is certainty.
Markets can survive optimism.
They cannot survive certainty at scale.
Once everyone agrees that a stock deserves a higher multiple, there is no one left to push prices higher except incremental buyers paying increasingly worse prices. That’s when returns stop coming from business performance and start coming from multiple expansion—which is a finite resource.
The Emotional Math Behind Expensive Stocks
Let’s be honest about what actually drives buying decisions late in a bull market.
It’s not discounted cash flow models.
It’s not spreadsheet rigor.
It’s not even greed, exactly.
It’s social comparison under uncertainty.
Humans are wired to measure success relative to others. When markets are rising, underperformance feels like failure—even if you’re still making money. A conservative portfolio doesn’t feel prudent when screenshots of outsized gains are everywhere.
So investors adjust—not their risk tolerance, but their reasoning.
They stop asking:
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“What happens if I’m wrong?”
And start asking:
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“What happens if I don’t participate?”
That’s when the P/E ratio of regret overtakes the P/E ratio of reality.
Why Great Companies Can Still Be Terrible Investments
One of the most dangerous beliefs in investing is the idea that buying a great company automatically leads to great returns.
It doesn’t.
It leads to owning a great company—which is not the same thing.
Returns depend not just on what a business becomes, but on what the market already expects it to become. When expectations are sky-high, even excellence can disappoint.
A company can:
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Grow revenues at double digits
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Expand margins
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Beat earnings estimates
And still deliver mediocre or negative stock returns—because the price already assumed all of it and more.
This is where regret enters. Investors look back and say, “But nothing went wrong.”
Exactly.
Nothing went wrong with the business.
The problem was the price.
How Narratives Inflate Multiples Without Anyone Noticing
High valuations rarely come from a single assumption. They come from layered narratives that reinforce each other:
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Disruption: This company isn’t bound by old rules.
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Scale: Growth will naturally lead to dominance.
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Network effects: Competition will never catch up.
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Optionality: There are “hidden” revenue streams not yet monetized.
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Macro tailwinds: Secular trends guarantee demand.
Each story on its own may be reasonable. Together, they form a valuation shield—any criticism can be deflected by pointing to a different layer of the narrative stack.
This is why bubbles don’t feel irrational while they’re happening. They feel overdetermined. Everything seems to support the same conclusion: higher prices are justified.
Until one assumption cracks.
The Asymmetry of Valuation Risk
One of the most underappreciated truths in investing is that valuation risk is asymmetrical.
When you buy a stock at 12x earnings and you’re wrong, the downside is limited. The market already expects modest outcomes.
When you buy a stock at 45x earnings and you’re wrong, the downside is severe—even if the company performs well.
Why?
Because high multiples leave no margin for error. Growth has to be not just good, but perfect. Any slowdown, any margin compression, any external shock forces the multiple to compress—and multiple compression is merciless.
A stock doesn’t need bad news to fall.
It just needs less good news than expected.
The Illusion of “Long-Term” Justification
Another hallmark of late-stage valuation logic is the appeal to the long term.
“If you’re a long-term investor, valuation doesn’t matter.”
“If you believe in the company, short-term multiples are irrelevant.”
“Over decades, quality wins.”
There is truth here—but it’s often misapplied.
Long-term investing does not mean ignoring price. It means understanding that price determines future returns. Buying at extreme valuations can turn even decade-long holding periods into exercises in opportunity cost.
A great business bought at the wrong price can produce:
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Years of sideways performance
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Long drawdowns
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Psychological fatigue that causes investors to sell at the worst possible time
The irony is that the people most confident about holding “forever” are often the least prepared for what happens when the stock underperforms for five straight years.
Why Regret Is Stronger Than Fear
Traditional finance theory assumes investors fear losses more than anything else. In reality, modern markets have introduced a competitor emotion: regret.
Losses hurt.
But missing out hurts differently.
Regret is social. It’s comparative. It’s reinforced by constant visibility into other people’s gains. And unlike losses, regret doesn’t show up on your account statement—it lives in your head, where it compounds quietly.
This is why investors chase performance even when they intellectually know better. Avoiding regret feels like risk management.
But regret-driven investing leads to:
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Buying late
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Selling early
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Overpaying for certainty that doesn’t exist
It is not an accident that the most expensive stocks always look safest right before they aren’t.
The Market’s Favorite Trick: Repricing Normal
Another reason expensive stocks still look cheap is that markets gradually reset what feels “normal.”
A P/E of 20 used to be expensive.
Then it became reasonable.
Then it became conservative.
Then it became cheap relative to peers.
Normalization is a powerful force. Once investors anchor to higher multiples, anything below them feels like a bargain—even if absolute valuation makes no sense historically.
This is how markets create new baselines that only exist until the cycle turns.
And when it does, the reversion feels shocking—not because it was unpredictable, but because everyone forgot what normal used to be.
When Valuation Finally Matters Again
Valuation doesn’t matter until it matters all at once.
There is rarely a single catalyst. Instead, a slow erosion of confidence:
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Growth decelerates slightly
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Guidance becomes cautious
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Margins plateau
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Rates change
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Sentiment shifts
At that point, narratives lose their power. Optionality gets discounted. Future earnings get pushed further out. The P/E ratio collapses not because earnings disappear—but because certainty does.
This is when investors realize they weren’t paying for earnings. They were paying for comfort.
And comfort is expensive right up until it vanishes.
The Real Lesson of the P/E Ratio of Regret
The lesson is not “never buy expensive stocks.”
It’s not “valuation is everything.”
It’s not “markets are irrational.”
The lesson is that price embeds expectations, and expectations are fragile.
Every stock looks cheapest at the moment when optimism is most widely shared and doubt is least tolerated. That is not coincidence. That is the structure of markets.
Investors who survive cycles don’t avoid growth. They avoid overconfidence disguised as valuation logic.
They ask:
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What has to go right for this price to make sense?
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What happens if outcomes are merely good instead of extraordinary?
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Am I buying earnings—or am I buying relief from regret?
Those questions are uncomfortable. That’s why they work.
The Final Multiple That Matters
In the end, there are many ratios in investing:
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P/E
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P/S
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EV/EBITDA
But the one that ruins portfolios most reliably is unmeasured:
The ratio between what you expect and what the market already expects.
When that gap closes, returns disappear.
Every expensive stock looks cheap right before it isn’t—because right before it isn’t is when belief peaks.
And belief, unlike earnings, has no floor.
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