One thing I’ve been thinking about this year is how much narrative and sentiment impact company valuations. I tend to be fact oriented, so paying attention to narrative doesn’t come naturally to me. But over the years, as a private-market investor in venture capital and a public-equity-market investor, I’ve been forced to acknowledge the impact of narrative and sentiment. This year’s AI-related sentiment has greatly impacted private and public valuations and led to some massive acquisition prices.

The quote that’s helped me incorporate sentiment and narrative into my thinking is from Benjamin Graham: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” He’s talking about the public stock market, but this holds true for public and private equity markets.

When sentiment and narrative are elevated, what people think about a company has an outsize impact on what they’ll pay to own a piece of it. But this valuation approach tends to be relatively short-lived. When sentiment is strongest (positively or negatively), jaw-dropping transactions that are anchored in sentiment and narrative more than in numbers sometimes occur. But as time passes and sentiment normalizes, buyers and acquirers tend to value companies based on the underlying business fundamentals.

This year has been interesting, and it’s enhanced my understanding of how big an impact sentiment can have on the prices people are willing to pay to own some or all of a company.