It’s very easy to take something as straightforward as a market and make it seem immensely complicated, and it’s something that we all do. But let’s step back for a moment and examine exactly what the market actually is.
The market is simply a meeting place for buyers and sellers. Those who own shares look to sell them at the best price they can, while people who want to buy shares try to do so at the lowest possible price. A trade will only ever occur when a buyer and seller agree on a price.
So in essence, the market is nothing more than a voting machine. All it tells us is exactly what price investors are willing to buy/sell at on a particular day. And in this regard the market can never be said to be right or wrong, overvalued or undervalued. What people pay/receive for shares is a personal decision and based on their own unique circumstance and motivations. It is what it is.
Investors’ judgment of value will depend on a wide variety of factors, and their own expectations for the future, whether right or wrong, will be their primary motivating force. We also need to accept that people are at times irrational, unpredictable and emotional. Furthermore, there is an almost countless set of variables that will act to shape the opinion of investors, and that these variables will impact different people in different ways.
For me, this means that a focus on specifics is a futile exercise, and besides is not essential for success. From an investment perspective, attempting to guess the exact price of a security at a specific date is at best a distraction, and at worst a recipe for failure. What really matters is ownership, which is what being a shareholder is all about, even though these days you would be forgiven for thinking otherwise.
Personally, I want to own a stake in the best companies in the world, and my ownership will entitle me to participate in the earnings and growth of the business in question. Of course, all businesses will rise and fall in value throughout the various stages of the economic cycle, and all will be subject to the possibility of unforeseeable negative effects. I can however accept this, and indeed I expect this to some degree. What matters though is that on average, over time, my assets will provide a reasonable and attractive return.
We need to distance ourselves from the daily onslaught of data and remember exactly what it is we are dealing with. That is, the market is nothing more than a mechanism to facilitate trade between buyers and sellers. It will result in the continuous valuation of assets, but those that focus purely on the valuation rather than the actual asset are at danger of missing the bigger picture. Price is of course important, but price alone tells us nothing. What matters of course is the price in relation to the quality of the asset. One must never detach one from the other; they are two sides of the same coin.
Make the markets work for you