Tuesday, December 18, 2007

The forest for the trees

As investors, we tend to get caught up in the fact that the stocks we buy and sell, when you strip away all the hype and/or pessimism around them, have some sort of quantifiable, underlying value to them. They're worth something in absolute terms, we reason, every time we buy a stock. If they didn't, why would we buy? They don't bring us any pleasure or improve our lives in any way, really, like a consumer product might do. They're pure financial instruments, so what's the point of buying them if we're knowingly paying too much for them? It must be quantifiable somehow, we tell ourselves.

But as much as I understand, and to a certain extent believe in, concepts like fundamentals, efficient markets and intrinsic value, the thing I'm learning as I age as an investor is that ultimately, none of of these companies are worth a penny more than what somebody else is willing to pay for them at any given time.

Among numerous other things to his credit, Ben Graham came up with the concept of Mr. Market. Mr. Market was essentially the collective wisdom of all the other investors but yourself, setting the prices for what he was willing to pay for any given security, often regardless of what the business was worth yesterday or how much money they actually make. He sometimes goes by different names, but Mr. Market has since made an appearance in a variety of different investing books.

I thought I understood the parable, but it's really hitting home of late, because my own stocks have been quite volatile for the last few months. Sometimes, I've been able to pin it on one particular event of piece of news. But often, I'll watch my stocks gain or lose several % in a single day without any idea why it's happening. I find it hard to learn from those sorts of situations.

Value investors like me love the thought that they're buying stocks "on sale." The rest of the market may not like it, but we're the kind of people who secretly cheer when a blue chip company's stock gets hammered, because it opens the door to us owning the company "for less than what it's actually worth." But really, there's nothing to say what a stock is going to be worth tomorrow, much less 30 years from now.

As much as we can try to ensure we keep an eye on things like cash flow, low P/Es, dividends and whatnot, ultimately, there isn't a thing we're going to be able to do if our cash-generating, dividend-paying, recession-proof blue chipper isn't catching Mr. Market's attention at any given time. Our options then are the same that they always are: sell to him for whatever he's willing to pay, or hold in the hopes he'll change his mind later.

Something to keep in mind at the moment, while you watch your blue chippers sink like a stone despite growing earnings, and wonder why.

1 comment:

nancy (aka money coach) said...

Hmm... I guess the assumption (and I'm a value investor too) is that eventually, the Truth Will Out, ie., Mr. Market will come to his senses and recognize a good thing when he sees it. But as you pointed out, Mr. Market frequently exhibits poor judgement. Nevertheless, trying to analyze and figure out Mr. Market's erratic personality is exhausting, so I'd prefer to stand by my tried and true company-friends rather than hang out with Mr. Market too much. So far, it's worked out reasonably well.

(although I'm cranky with Mr.Blogger from excluding me as a clickable link simply because I selected wordpress instead of him!)