Should You Care That The Market Is Overvalued- It Depends!

Most investors suffer from what I believe is an unhealthy (unprofitable) obsession with the stock market. Financial writers and professional investors never tire about offering up their opinion on what the market will do next – especially short term. Individual investors also are deeply concerned with how the markets are doing on a daily basis. To me this only makes sense if you actually own the “stock market” i.e., an index fund. Otherwise, only what you actually own should be of any concern to you. Since I have been in the investment business, I have emphatically stated that I do not believe in investing in the stock market, never have and never will. Since people know that I manage stock portfolios, this always conjures up bewilderment. You can see it in their eyes, asking how I can make such an outlandish statement. Well, I can because it’s the truth. I invest in individual companies and build portfolios one business at a time. The so-called “stock market” is only the store at which I shop to buy what I want to own. Just like any other market; grocery stores, drug stores, clothing stores, etc., once I buy what I desire, the store no longer matters. The stock market, in all its iterations, whether the Dow or the S&P 500 or any number of other indices are averages. Therefore, by definition, “average” is simply a middle number. Consequently, the logical conclusion dictates that within the average are above-average and below-average companies as well. To carry this thought further, you can also say that logically there are most likely way above-average companies, way below-average companies – and everything in between.

Mind Your Owned Business!
Therefore, in response to the question posed in the title of this article – should you care that the market’s overvalued – my simple answer is no. Instead, I believe you should mind your owned businesses. In other words, quit worrying about the overall market average, and place your attention on the companies (stocks) that you actually own. I find it odd that we revere the greatest investors such as Warren Buffett, Peter Lynch, Ben Graham and Marty Whitman, yet we mostly ignore their sage advice. Nowhere is this more evident than how most investors think about stock prices compared to how the masters do. Warren Buffett has lamented “For some reason people take their cues from price action, rather than from values.” Here he is telling us that the business value is more important than the short-term market appraisal. In ‘One Up On Wall Street’ Peter Lynch said “What makes stocks valuable in the long run isn’t the market, it’s the profitability of the shares in the companies you own.” Peter’s advising you to mind your businesses’ operating results, not its price. And of course, the famous Ben Graham, teacher to them all, offers his priceless metaphor, “In the short run the market is a voting machine, but in the long run it’s a weighing machine.” Ben is pointing out that intrinsic value (weight) is the true worth of the company you own, while short-term market price can mis-appraise. Don’t get me wrong, I really don’t blame people for failing to get this critical point. Other than these masters there are few support groups to help them. Most charting tools are focused solely on price. Therefore, investors have scant resources that calculate intrinsic value. As a result, all they have to judge value on is the current price offered by an auction market. This is what I mean when I say that measuring performance without simultaneously measuring valuation is a job half done. Marty Whitman has said “Unrealized Market Depreciation occurs when the market price of a publically traded security declines. Permanent impairment of capital occurs when the fundamental values of a business are dissipated with the consequent long-term adverse consequences.” Marty is advising to not sell a business for less than it is worth just because the price is temporarily weak. The FAST Graphs (Fundamentals Analyzer Software Tool) I use to chart stocks focuses first and foremost on true worth values and then measure stock price in relation to those values. Knowledge truly is power. Ignorance can be very costly when investing money. In modern times herd mentality is mostly emotional – not rational. Over the past two decades, either fear, now greed, has dominated the financial markets. Volatility is often too extreme to be sensible. As I have said before – the reality of running with the herd is that your ultimate destination is the slaughter house.