is Where You Sit
A
15 year old standing atop a challenging ski slope sees nothing but
adventure ahead. A 55 year old in the same position prays he can get
to the bottom without any severe injuries. Same situation; different
perspectives.
In
the case of investing, however, it is hard not to follow the
perspective of the crowd. Investor sentiment was on a giddy adrenaline
rush during the tech and real estate bubbles that arose over the past
decade. But as the market crashed at the end of last year and into this
year, fear ruled the day.
Brian Pfeifler, Managing Director of Morgan Stanley Wealth Management, summed it up nicely in a recent interview in Barron's.
He stated that during the tech bubble, investors did not care about
valuations. "If you had a discussion about price/earnings multiples,
they didn't want to hear about it. It was just, the market was going
up, and they wanted to participate."
Conversely, when the market
hit lows in March "it was not about valuation" even though valuations
looked attractive, because investors were expecting the economy to
remain in ruins for an extended period of time. People did not care if
stocks appeared to be a potential bargain, "they just wanted out of the
market."
The media makes it easy to be swept up in the mania of the day as a recent article in Morningstar.com
highlights. Unfortunately the media often gets it wrong. Headlines
such as "The Big Bad Bear" and "The Death of Equities" bemoaned the
dismal stock market in the 1970s -- just prior to the market making a
significant recovery. On the flip side, headlines declaring "How to
Invest in the Hottest Market Ever" inevitably came right before the
bubble burst.
Benjamin Graham, Warren Buffett's mentor, said
that in the short term the stock market is a voting machine and in the
long run it is a weighing machine. In other words, emotions rule the
day for investment decisions in the short term as investors get caught
up in the manic ups and downs. In the long run, however, Graham
believes that the true underlying value of companies eventually wins
out as the stock market becomes a reasonable approximation of the
realistic worth of its component parts.
A political science
professor of mine always said that "where you stand is where you sit."
(A rare recollection from my college days.) His point was that both
our physical location and cultural values (where we sit) deeply affects
our position on any particular issue (where we stand).
In the
world of investing, we often sit with the crowd, which has shown a
propensity for running amok on occasion. Sometimes we need to readjust
our perspective in an effort to obtain a more objective view of -- as
Marvin Gaye would say -- what's going on.
Words of Wisdom
-- George Bernard Shaw
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