Market Valuations in Times of Volatility
What's a fair price for the stock market? Is it a multiple of earnings? Should we look at sales growth? What about book value of assets?
Unfortunately, there is no right price for the stock market. You can do all the math and modeling you want. Fancy calculations carry no weight. All that matters is the voting of market participants.
Those participants are people and people are irrational. (Disclaimer, you and I are both peoples.)
When things are going well people look to the future with optimism. That's where we were a month ago. In the 90's could you have imagined how much technology growth we were going to have over the next 20 years? If you did, you would have been buying stocks non-stop through the tech bubble burst, 9/11 and the financial crisis. The short-term fears of the moment could never outweigh the power of human innovation.
Right now, however, people have switched to fear. They can't see how great the world will be in the year 2040. They can only imagine how bad things might be in 3 months.
You might be thinking, what does any of this have to do with market valuations? Great question.
At the start of the year the predominant emotion was optimism. Let's say that however good things were, they weren't quite as good as we thought. Maybe the market was 10% too optimistic. Then we have a market shock in the coronavirus. We don't know how much of an impact it will have but let's use 10% as a round number. Finally, the predominant emotion could switch to pessimism. We can't quantify that but let's say the market moves to 10% too pessimistic.
What does that look like?
A 30% drop from the peak in the Dow Jones would take us to about 20,700.
This is in no way or form a prediction. It is simply an illustration of how much the market can swing.
I believe in 20 years we'll be in a far better, richer and more prosperous world. Over time the stock market will fluctuate in a range around a "fair" value. We can't risk the money you need today on a market that can swing 20% on emotions. We can't afford to not invest the money you need in 20 years in companies that will build a future beyond belief.
There's no predicting whether we're at the bottom today or have 20% more to drop. Those scenarios look identical in the moment.
All we can do is execute a system of investing that takes the emotions out of our decisions. Being a rational investor in an irrational world works wonders.
Imagine the power of being able to take the emotions out of your investment decisions.
Imagine being able to live your best life regardless of what the stock market is doing.
If you're like most people, your life savings are too important to separate from your emotions. You may like working with me because I'll build you a systematic approach to investing based on your goals, your life and your financial plan.
Investments carry the risk of loss. Before implementing any investment plan or changes consult with a qualified professional.
