CONCEPT
Multiple Anchoring
The investor pathology of valuing companies by comparing current multiples to historical multiples — treating the historical multiple as a law of nature rather than the artifact of a narrative that may no longer apply.
Multiple anchoring is the most common form of investment analysis and one of the most dangerous during a narrative transition. The pattern: an investor observes that a stock used to trade at a higher multiple, concludes the current lower multiple represents a deviation from normalcy, and buys on the expectation that the multiple will revert. The pathology is the assumption that multiples are stable independent of the narratives that produced them. They are not. A multiple is the market's compressed expression of expectations about growth, margins, risk, and competitive position. When the underlying narrative changes, the multiple changes with it, and the old multiple becomes meaningless as a benchmark. During the SaaSpocalypse, multiple-anchored investors saw eight-times-revenue Salesforce as cheap relative to its twelve-times historical multiple. Damodaran's framework reveals this as a specific bet on narrative reversion — and an unsupported one, because the narrative that justified twelve times has structurally broken.
