Market ups and downs have little to do with true value

This is the second of three articles based on a letter I sent my clients in mid-October. I left you last week saying that skittish investors whose fears are stoked by babbling experts (I was careful to remove myself from that category) cause the daily gyrations of the market. What I didn’t do was tell you what affects the longer-term worth of your stocks. So here goes…

You don’t hear this from the media pundits, because it’s boring: The men and women who are just doing their jobs determine the true value of your stock holdings. These millions of workers (billions if we throw in India and China) go to work every day to make careers for themselves and provide for their families. Whether on the farm, in a factory, or high in an office building, their slow, steady labors increase the value of the companies they work for.

That incremental progress hasn’t stopped, last time I checked. The economy is still growing (slowly). You are not bombarded daily with the true value of your investment when it’s your car or house. But when it comes to investments, you are hit with the daily price changes brought on by the changing opinions of skittish investors. To find your investment’s long-term value takes, well, a long time. Value is built over time, no matter what the markets will do tomorrow.

But what about that Black Swan event like the credit crisis of 2008? Or maybe since the market is so much higher than it was in 2009…what if we are in a bubble that is about to pop?

First, I don’t see any signs of a bubble. It can be argued that stocks are higher than they should be (and the opposite has good arguments as well), but I just don’t see a bubble. Then again, 10 and 20% losses don’t depend on a bubble. And in 2007, on the eve of the financial crisis, we weren’t in a bubble either.

So what if something dreadful has just begun in the market? What if those shouting the sky is falling are right?

Well, the obvious answer, if people who say the market will go down for a while are right, the obvious answer is that you should sell all your stocks.

But, I counter, what if they are wrong? Well then, the obvious answer is that you keep the stocks you have and maybe buy some more. (You can substitute in “bonds”, “real estate”, “commodities” instead of stocks as the same can be said about those markets as well.)

The truth is that one of those two scenarios is wrong. And even if the doomsayers are right, they are never right forever because over the long-term the market is up. So in the worst case scenario, all we have to do is wait and everything will turn out all right.

There are three problems with this. But alas, I’m out of room again, so come back next week and we’ll finish this up.

This article was published under the title "True value is usually built over time" in the Wichita Falls Times Record News on November 16, 2014.