Beyond The Headlines
The Ode to the Market (and Speculators)
I had an inspiring call with a young investor recently. I’m always open to taking a call with anyone curious about investing. I’m still as passionate about investing as I was two decades ago. If anything, I find more reasons to be. Our call made me think that the stock market no matter how volatile, imperfect, or disturbed it seems; it’s a truly beautiful invention – let me explain.
I enjoy those calls because I get to relive the moment when I picked up my first investing book, and I could never look at stocks the same way. It’s One Up on Wall Street by Peter Lynch. Mr. Lynch shared many ideas in his volume, yet one struck a chord with me the most. He said — stocks are small pieces of businesses. Yes, they have a few letter symbols and prices, but what’s truly exciting about them is the business they represent. I had a few dozen finance professors until then at various universities — they showed me lots of theories, academic research and more. Still, none said what Mr. Lynch said so simply – stocks are small pieces of businesses!
My best guess is that they were painfully burnt by the dot-com bubble, where they likely lost their savings and openly disdained any talk of the stock market in class. It’s a casino where no one can win – that’s what they told me. As a contrarian at heart, you won’t be surprised that this was exactly the field of inquiry I chose.
I loved the idea that anyone can buy shares of any publicly traded company. The stock market doesn’t ask or care who you are – young or old, rich or poor, where you came from, where you are going. I oversimplify here; not all public markets might be open to foreign investors, and there might be some hurdles to clear, but a US investor can buy any US stock with even a small amount of money, and any other investor can do so in their domestic market, and likely in the US market, too. They can thus become a shareholder like any other shareholder all the way to the CEO or founder of such a company. For me, it was an earthshattering discovery then, and it still gets me talking about stocks today!
The moment I buy a share, I become partners with those who started it, if they are still around, and with anyone else around the world who, for one reason or another, believes that this company can do well and wants to be a part of its success. It’s quite a blessing that we get to do that!
The stock market is a place where those shares are traded. It used to be a physical place, where shares were traded in a physical form with trade tickets written and exchanged and share certificates getting moved in boxes from place to place. I visited the New York Stock Exchange on a few occasions, but on my first visit, I saw the last of paper tickets and floor traders – an end of an era. It’s all digital now, but the concept remains the same. Each share still is a small piece of a real business.
In that market, though, anyone is welcome, and people join for various reasons; some want to hold their shares for a day or mere minutes, others for years, and some don’t want ever to sell, and choose to pass them on to the next generation or a favorite charity. The choice is yours.
The time horizon of the participants though splits the stock market enthusiasts into at least two groups: speculators and investors. In my mind, the first one represents those who care more about the price action and less about the underlying business. The latter, the opposite, they are all about the business and have little care or worry about any short-term price action. They know they own something – a profit-making business.
Benjamin Graham, the father of value investing, famously said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” As you can guess, the speculators do the voting; the investors do the weighing. I’m under the impression that the market activity is sometimes dominated by the former or the latter, and hence the market as a whole can resemble a voting machine or a weighing machine.
I would add that these are the moments of either extreme euphoria or extreme panic when the speculators take the lead. They seemingly don’t care to know what they hold, or they do know it’s really worthless in the long run; hence their interest and commitment are relatively fleeting. They usually leave as quickly as they came. Investors are the ones that stay. They never really leave. They hold the companies they like for the long run and don’t get easily spooked by market sell-offs. They also equally strongly resist joining any madness at the market top. Slow and steady would be the best way I would describe them.
The market itself continues to impress me, and I’ve been watching it for a quarter of a century and as a professional participant and investor in my own name, and our clients’ names, for almost two decades.
There are times when speculators create an overhyped market in almost anything, including profitless companies without a sustainable business model. These are companies that simply give away $100 bills charging $50 and think that somehow they can pave their path to success with ever bigger losses. Venture capital firms made a bet on them and managed to take them public, where speculators bid them up even higher. It happened last year, and it happened dozens of times before in the history of the market. Remember, though, speculators are not here to stay. All they care about is a rising price. The moment it falls, they run.
Time after time, I have witnessed companies with no real business-to-show-for see their prices rise. Also, time after time, I noticed that the very same market patiently allows speculators to dance away, only to see them panic and sell.
Who is left? Investors. They weigh; they don’t vote. They already knew those companies are worth 5 cents on the dollar at best, possibly zero.
Last year in November, a myriad of companies, from sporting equipment to online car dealerships, and more, with no real, sustainable profit-making businesses, traded at eye-popping valuations. It was the time of fear of missing out; you only live once, suspension of disbelief – anything goes!
Over half a year later, the market spoke again, and those companies finally trade exactly where they should — 90% down or lower. How much is a profitless business with no path to profitably worth? We think, and we know – zero, short of a miracle turnaround; hence, the market gives them 5 or 10 cents on the previous dollar, still just in case something unlikely saves them. Remember, not all speculators ever leave; some haven’t had enough pain and still hold on with hope. I sometimes think that those 95% losers end up at the bottom of someone’s portfolio, and they just forget to sell it, and if they all did it, the stock would be right where it belonged from the beginning – zero.
Looking back at this remarkable half a year, I want to share this Ode to the market. Speculators, inflation, interest rate hikes, talking heads on TV, none of it matters. The market, in the end, plays the same role it did when Ben Graham watched it with great admiration a century ago, devoted his life to his study, and inspired generations of others who followed.
All this to say, the market will do its job despite all the noise and disturbance, and so will we. We look for quality businesses, just as Peter Lynch told us, hold them, and let the speculators come and go. If anything, their rollercoaster ride of emotions allows us to buy stocks at even lower prices and sell them at even higher prices than if the whole market was full of level-headed, calm, and collected investors.
Thank you, Dear Market, and Thank you, Speculators.
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