What Has Changed in Valuation Over the Last 35 Years?

While market conditions have shifted dramatically over the past three decades, the core principles of valuation remain constant. The biggest mistake executives make is focusing too heavily on short-term earnings rather than long-term value creation. Understanding what drives sustainable value and having the courage to be a contrarian when needed are the hallmarks of great business leadership.

Through the dot-com bubble, financial crisis, and pandemic, one thing hasn't changed: the fundamental principles of valuation. McKinsey partner Tim Koller, coauthor of Valuation: Measuring and Managing the Value of Companies, shares lessons from 35 years of helping executives create value.

The Biggest Misconception: Short-Term Thinking

The most persistent mistake hasn't changed since the late 1980s: business leaders believe the stock market obsesses over short-term earnings and make strategic decisions accordingly. Research proves this wrong. Long-term investors account for approximately 75 percent of the market. Short-term traders are simply noisier, asking more questions and grabbing more attention, but they don't drive valuations.

Companies repeatedly cut costs to boost quarterly profits, only to find growth eventually lags the market. Koller has never seen a company successfully cut its way to sustained success. It may work temporarily, but eventually undermines the business in ways that sometimes can't be repaired.

Principles Over Panic: Lessons from Market Bubbles

During market disruptions, leaders who abandon core principles make poor decisions. In the late 1990s, executives believed traditional economics no longer applied. The wisdom was simple: get big fast, and profits will follow. Electric utilities bought power plants worldwide with no synergies. Almost all failed because size doesn't automatically create value; sometimes it just creates complexity.

Today, with companies valued over one trillion dollars, Koller applies the same framework: What would you have to believe for these valuations to be justified? Are those beliefs reasonable? What's driving the valuations? Are those factors sustainable? This separates genuine value from market enthusiasm.

Thinking in Time Frames: Recessions and Investment

A valuable framework is matching investment horizons with business cycles. When a retail grocery chain considered cutting capital expenditures during recession concerns, analysis revealed it takes two to three years to build a store while typical recessions last only 12 months. Many investments outlast recessions. Companies that don't invest during downturns often fall behind when economies recover.

This extends to evaluating opportunities at micro versus aggregate levels. Even during nationwide recessions, specific markets need new stores. Growing communities require services regardless of broader conditions.

Overcoming Organizational Biases

Even with sound principles, human biases undermine decisions. Companies without strong debate cultures fall victim to groupthink. Solutions include assigning devil's advocates or conducting secret ballots at meeting starts. When individuals see others share their views, they gain confidence to speak up.

Confirmation bias leads teams to seek data confirming preferred conclusions. The premortem technique counters this by forcing teams to analyze potential failures upfront. AI may eventually help by monitoring meetings to identify when leaders dominate or teams exhibit bias. The challenge will be whether executives accept feedback from technology about their decisions.

The Market's Imperfections: Understanding Bubbles

One surprising lesson over 35 years: markets aren't as perfect as theory suggests. While generally good at valuing companies, markets sometimes get it wrong. In theory, buyers and sellers balance each other. In practice, certain dynamics create imbalances.

When companies generate excitement, retail investors buy without analysis. Professional traders follow the momentum. Large funds worry about missing hot stocks. Meanwhile, short selling is expensive and risky, limiting counterbalancing forces. This creates bubbles. They always correct, but understanding the mechanism helps investors avoid getting caught in enthusiasm.

Timeless Leadership Qualities

Would a great CEO from 1990 succeed today? The essential characteristics haven't changed. Great CEOs must be strong strategists who understand their business economics deeply and make courageous long-term decisions about shutting down declining businesses or investing in new opportunities.

Most importantly, they need confidence to be contrarian when conventional wisdom points the wrong direction. Warren Buffett succeeded by going against crowds. Banks surviving the financial crisis best avoided the mortgage-backed securities trend even when others profited.

Key Takeaways

Long-term investors drive the market: Approximately 75 percent of the market consists of index funds, retail investors, and long-term institutions. Short-term traders are noisy but not dominant. Focus your strategy on creating sustainable value, not managing quarterly earnings.

Match investment horizons to business cycles: Most strategic investments have longer time spans than typical recessions. Cutting investment during downturns often means falling behind when conditions improve. Consider opportunities at the micro-market level rather than only in aggregate.

Build systems to counter bias: Groupthink and confirmation bias undermine decision-making. Create structured debate forums, use devil's advocates, conduct secret ballots, and run premortems to identify potential failures upfront. The best decisions come from challenging assumptions, not confirming them.

Have the courage to be contrarian: Great leadership requires the confidence to go against conventional wisdom when analysis suggests a different path. The banks that navigated the financial crisis most successfully avoided the mortgage-backed securities trend. Sometimes the most valuable decision is the one you choose not to make.

Conclusion

Business has transformed dramatically over 35 years, but the fundamentals of creating and measuring value remain constant. What's evolved is our understanding of market imperfections and behavioral factors causing mistakes.

For executives, the implications are clear: focus on long-term value over short-term metrics, make strategic investments based on analysis rather than immediate conditions, build processes that challenge assumptions, and have courage to be contrarian when data supports a different path. These principles have guided successful companies through bubbles, crises, and pandemics. Are you building for the next quarter or the next decade?

Source: McKinsey and Company, May 2025