What Next Is A Dumb Question

You may have noticed the last two days have been hard on investor confidence. The Dow and S&P 500 are down about 7%. If that rate of decline were to continue for 30 weeks, you would have less than half of 1% of your portfolio remaining.

The question of course is, how low will it go? Secondarily, when will it bottom out?

Are there any among us who believe the S&P will get to 150?

There are always two values.

The market value is determined by the people who are buying and selling stock. Their motivation is unknown but in general optimism moves prices up and pessimism moves prices down. Just now pessimism is ruling the results.

Business value is the other value. If Amazon, or Apple, or Microsoft fall by 7% in the market pricing arena, do you think the business is going to do 7% worse in the future? If yes, why do you think that?

Each could have a setback. Apple may have trouble supplying products that depend on Chinese productivity, but they will adjust as best they can. I doubt they can lose 99.5% of their business value.

If you believe the problem will persist and China will disappear as a manufacturing center, we will have more problems than the stock market will describe.

Day to day doesn’t actually matter

Day to day pricing is a purely market value issue. Emotional buyers can change on any news and the price of stocks will follow. As wise person once told me that Rome wasn’t built in a day and it wasn’t destroyed in a day either. Same thing for Apple and the others. They are not going away any time soon.

People are ingenious

All adversity is immediately met with motivated behaviour to overcome the obstacle. That has been true as far back as records have been kept and it is diffiuclt to imagine when humanity as a whole will just give up. The immediacy of the problem disguises the fact that the solution is already seeded. It will grow and with time and some nurturing it will prevail.

As people see the solution rising or the problem diminishing, the market will generate prices that parallel the underlying business value.

The solution for today

You cannot determine what will happen next.

In the short run, the market is not fully rational. Just like stressed people. Making decisions in the face of irrational behaviour seems somehow wrong. Perhaps people should look a little past the what happens next event and try to assess the what happens when condition.

Markets can’t stay irrational forever because business values tend to be real. Eventually the market adjusts to those values. If you need the money next week, the right decision is different than if you need it 20 years from now.

Market fluctuations happen but they have little relationship to where the market will be in the longer term.

Try to keep it all in perspective. If you go and look at the effect of reality overcoming mania you will see that huge moves in market prices are nearly invisible over the long run. If you are an investor, that is someone who relies on business value for success, what is fundamentally different today than a month ago? What’s next doesn’t matter if what will be there in six months works. What then matters more than what’s next

The thought is well expressed by Morgan Houssel. The shut up part is optional, the wait part is not.


 


I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: