The primary objective of this article is to help the reader put this recent bad market in perspective and simultaneously provide lessons in valuation and how to think about stock prices. There have been many sage pieces of wisdom that have been provided to investors by investing greats. For example, in 1995 Peter Lynch wrote this in Worth Magazine: “what makes stocks valuable in the long run isn’t the market. It’s the profitability of the shares in the companies you own. Corporations become more valuable and sooner or later, their shares will sell for a higher price.”
Nevertheless, my own personal anecdotal experience indicates to me that people react to stock price movement and rarely, if ever, compare that movement to the profitability of the companies they own. I consider this a mistake, but also at the same time recognize that it is only human nature.
Consequently, the emotional response to the stock market is extremely strong. When markets are rising people are likely to get more confident and unfortunately even complacent. In contrast, when markets are falling people are likely to become fearful with doom and gloom scenarios replacing “sugar plums dancing in their heads” even during the holiday season. However, it is my contention that it is rarely as simple as prices are rising or prices are falling. Most importantly, I make it a practice to never react to price action. Instead, my approach is always to analyze and evaluate whether price volatility is justified – or not. In other words, my approach is intellectual rather than emotional.
As a registered investment advisor with more than 45 years’ experience, I have often lamented that I live in money manager hell. When my clients are giddy with enthusiasm about the market, I tend to be morose and gloomy. In contrast, when my clients are miserable and frightened, I tend to be ecstatically optimistic. My experience has taught me that bull markets eventually bring risk, while bear markets bring opportunity. Therefore, instead of being caught up in the moment, I tend to be focused on what the future is likely to bring. Bad markets bring long-term profits; good markets bring risk and overvaluation. Consequently, I love bad markets and hate good ones. However, my approach and attitude are predicated on understanding, within reason, what the true value of each of the companies I own truly is. Therefore, I can recognize both rational and irrational market behavior as it occurs. In my opinion, nothing is more calming during turbulent times.