Should You Care That The Market Is Overvalued - It Depends

Includes: CVS, F, GOOGL, GT, LMT, MU, O, OI, TSCO
by: Chuck Carnevale


Pay close attention to what you specifically own, and less attention to generalities such as the stock market.

I do not believe in investing in the stock market, never have and never will.

The so-called “stock market” is only the store at which I shop to buy what I want to own.

Mind Your Owned Business!

Bonus:  FAST Graphs Video S&P 500 Stocks.


Most investors suffer from what I believe is an unhealthy (unprofitable) obsession with the stock market. Financial writers and professional investors never tire about offering up their opinion on what the market will do next - especially short term. Individual investors also are deeply concerned with how the markets are doing on a daily basis. To me this only makes sense if you actually own the “stock market” i.e., an index fund. Otherwise, only what you actually own should be of any concern to you.

Since I have been in the investment business, I have emphatically stated that I do not believe in investing in the stock market, never have and never will. Since people know that I manage stock portfolios, this always conjures up bewilderment. You can see it in their eyes, asking how I can make such an outlandish statement. Well, I can because it’s the truth. I invest in individual companies and build portfolios one business at a time. The so-called “stock market” is only the store at which I shop to buy what I want to own. Just like any other market; grocery stores, drug stores, clothing stores, etc., once I buy what I desire, the store no longer matters.

The stock market, in all its iterations, whether the Dow or the S&P 500 or any number of other indices are averages. Therefore, by definition, “average” is simply a middle number. Consequently, the logical conclusion dictates that within the average are above-average and below-average companies as well. To carry this thought further, you can also say that logically, there are most likely way above-average companies, way below-average companies - and everything in between.

Mind Your Owned Business!

Therefore, in response to the question posed in the title of this article - should you care that the market is overvalued - my simple answer is no. Instead, I believe you should mind your owned businesses. In other words, quit worrying about the overall market average, and place your attention on the companies (stocks) that you actually own.

I find it odd that we revere the greatest investors such as Warren Buffett, Peter Lynch, Ben Graham and Marty Whitman, yet we mostly ignore their sage advice. Nowhere is this more evident than how most investors think about stock prices compared to how the masters do. Warren Buffett has lamented “For some reason people take their cues from price action, rather than from values.” Here he is telling us that the business value is more important than the short-term market appraisal.

In ‘One Up On Wall Street’ Peter Lynch said “What makes stocks valuable in the long run isn’t the market, it’s the profitability of the shares in the companies you own.” Peter is advising you to mind your businesses’ operating results, not its price. And of course, the famous Ben Graham, teacher to them all, offers his priceless metaphor, “In the short run the market is a voting machine, but in the long run it’s a weighing machine.” Ben is pointing out that intrinsic value (weight) is the true worth of the company you own, while short-term market price can mis-appraise.

Don’t get me wrong, I really don’t blame people for failing to get this critical point. Other than these masters there are few support groups to help them. Most charting tools are focused solely on price. Therefore, investors have scant resources that calculate intrinsic value. As a result, all they have to judge value on is the current price offered by an auction market. This is what I mean when I say that measuring performance without simultaneously measuring valuation is a job half done.

Marty Whitman has said “Unrealized Market Depreciation occurs when the market price of a publically traded security declines. Permanent impairment of capital occurs when the fundamental values of a business are dissipated with the consequent long-term adverse consequences.” Marty is advising to not sell a business for less than it is worth just because the price is temporarily weak. The FAST Graphs (Fundamentals Analyzer Software Tool) I use to chart stocks focuses first and foremost on true worth values and then measure stock price in relation to those values.

Knowledge truly is power. Ignorance can be very costly when investing money. In modern times, herd mentality is mostly emotional - not rational. Over the past two decades, either fear, now greed, has dominated the financial markets. Volatility is often too extreme to be sensible. As I have said before – the reality of running with the herd is that your ultimate destination is the slaughter house.

It’s A Market Of Stocks Not A Stock Market

The primary message that I am attempting to convey with this article is to suggest that investors pay close attention to what they specifically own, and less attention to generalities such as the stock market. This also ties in to another mantra that I have chanted many times: it’s a market of stocks not a stock market.

The essence of this phrase lies in the understanding that the individual companies that make up the so-called stock market are unique to themselves. Not all stocks are the same, and in many cases, the disparities are enormous. Consequently, when investors are generalizing about the stock market, they are in effect denying the unique attributes that individual companies possess.

This concept also applies to valuation. Within the large universe of stocks that make up the market, there will be overvalued, undervalued and fairly valued individual stocks to be found. Obviously, long-running bull markets will produce a greater number of overvalued stocks, and bear markets will produce a greater number of undervalued stocks. However, regardless of the market we are in, there will always be some of each.

The S&P 500: A F.A.S.T. Graphs™ Video Analysis

In the following video, I provide specific evidence of the assertions I presented with this article. I will clearly illustrate how different companies that make up the market (S&P 500) truly are, and provide examples of both overvalued and undervalued businesses.

Source: F.A.S.T. Graphs Video

Summary and Conclusions

My dear mother always taught me - mind your owned business. Little did she know that her lesson also applies to my investing career. I never really worry about what the market is likely to do, what the Federal Reserve is likely to do - nor any other broad macro concept. Instead, I mind my own businesses. I pay careful attention to the specific businesses I own, their valuations and prospects for future growth. I built my portfolio one company at a time, and I manage my portfolio one company at a time. To me this really simplifies the investment process, and offers the side effect of less to worry about.

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Disclosure: I am/we are long CVS.

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

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