Where You Stand 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

Fashions are induced epidemics.
-- George Bernard Shaw