Is The Market Rising Or Tanking? It Doesn't Matter

| About: SPDR S&P (SPY)

Summary

With volatility back in the market, many have been making calls on the market.

It is in fact easier and more practical to focus on a small group of stocks than to make judgment on the whole market.

Each market participant has his or her own motive. If you don't know the motive, how can you predict the market?

The V20 Portfolio seeks to make gains by doing something that is easier and more practical, as well as ridding itself of any artificial constraints.

With volatility returning to the market, there are no shortages of predictions in financial media. However, it is my belief that it is pointless to make such predictions about the overall market (SPY, QQQ, DIA). I think it's safe to say that many investors breathed a sigh of relief after a horrible start for the week. Will this rally hold? I don't know. If you've been following me for a while, you know that I focus on fundamentals of specific companies as opposed to the market. The practice of conducting research on a specific company certainly looks a lot harder than making a generic guess on the S&P 500. However, I believe that it is in fact much easier and more practical.

Let's take a look at what really is "the market." Take the S&P 500, people often forget that it's a collection of 500 stocks picked by a committee. If I ask you how one values a company, the answer would be simple. You do in-depth research about the company, understand how it makes money, and calculate the future earnings. But what about 500 companies? The process doesn't change. To evaluate 500 companies, one would need to perform in-depth analysis 500 times. This is the first problem of predicting "the market." No one has the time (I certainly don't) to conduct in-depth research for every single company, arrive at a valuation, and then calculate the fair value of the index.

There is another problem. The market, by definition, consists of market participants that act in their own interests. Who exactly invests in the S&P 500? Not only can we divide market participants according to their expertise (retail vs. institutional), each participant also has his or her own motivation. To give a very simple example, if there is a large redemption request for a hedge fund, you can be sure that the fund will sell, regardless of whether valuation is in line with reality or not. By the same token, if a mutual fund just got a big client, you can be sure that it will buy. In other words, short-term movements of the index not only depend on valuation, but also the motivation of each market participant.

If you put two and two together, you can see the problem with predicting the market. Not only do you need to perform due diligence for each company, you would also need to know the motivation of every single market participant. If the former is hard, the latter would be impossible. However, these problems do not seem to faze many investors, who continue to make general predictions about the market. Perhaps they know something that I don't, but to me, making predictions about the general market direction is a pointless exercise.

Why The V20 Portfolio Works

As I mentioned earlier, researching 500 companies is much harder than looking at just one company. By focusing our effort on a specific group of stocks, the V20 Portfolio already has an advantage. Furthermore, the V20 Portfolio is not bound by artificial constraints. Some investors may only be looking for dividends, some mutual funds can only focus on energy stocks; whereas our sole motive is to make money over the long-term. Finally, the V20 Portfolio is not forced to buy companies indiscriminately. If company A is better than company B, why would you buy company B? The fact that both companies belong in an index should not influence anyone's portfolio decisions.

Note: I spend a great deal of time researching every company in the V20 Portfolio (+40% in 2015). If you are looking for some ideas that could complement your own portfolio, you can click the "Follow" button and be updated with my latest insights. Premium subscribers will get full access to the V20 Portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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