The Right Question To Ask About The Crazy Markets

I fully admit that I did the wrong thing back in 2008 when the stock market got walloped. I had only been investing for about 10 years and I freaked out:

I logged into my 401(k) account late one night and lowered my contributions so that I put in exactly enough to get the company match and no more. For the next couple of years, I paid no attention to my investment accounts. The latter decision, not to look at my accounts, was actually wise. Dead people are great investors. The first decision to stop investing was very, very bad.

The Store Is On Sale

One of my favorite investing quotes is this one from Warren Buffett:

The stock market is the only store that people run for the exits when everything is on sale.

My mistake has cost me hundreds of thousands of dollars so far. By the time I die, it will most like have cost me millions. But, I had to go through the storm and make the mistake to learn.

Now, I’m better.

I’m not a market timer. Not much of one anyway. However, when Mr. Market is really naughty, if I have any spare cash lying around, I send it to the front lines. Buy! Buy!! Buy!!!

So, it makes me a little sad when I see comments like this online (I changed the wording a little because I don’t want to call anyone out specifically):

I just can’t take this anymore. I keep contributing to my 401k and it keeps going down. I’m stopping my contributions until this sh*t changes. When will it stop going down?

The Right Question

The commentor is asking the wrong question:

When will it stop going down?

Before I tell you what the right question is, consider this chart:

The chart above shows the PE ratio of the S&P 500. The higher the number, the more overvalued the stock market is. Here’s some more data:

So, the historical mean PE is 15.97 and even after recent tantrums, Mr. Market is still at an exhuberent PE of 20.34.

The anonymous human above complained about their 401(k) going down. But the way I see it, we’re lucky to be where we’re at. Europe is at war. Inflation. Political strife. All sorts of sh*tburgers and Mr. Market is still overvalued.

Perhaps the correct question is this:

Why was Mr. Market so inflated in the first place?

In a time of cheap money (low interest rates), the dollars had nowhere else to go. Mr. Market was artificially pumped up. Now that money is getting more expensive, dollars are flowing out of stocks. It’s the natural flow of things. The pendulum has stopped and is now swinging in the other direction.

This thought puts me at peace. Mr. Market is reverting back to the mean.

Don’t Worry, Be Happy

When I consider my investments, it helps me to focus on the business, not the stock price. Would you rather have:

• A company that’s knocking it out of the park, but with a depressed stock price due to macroeconomic factors.
• A company that’s moping along, but with an inflated stock price due to an external factor like low interest rates or hype.

Of course, the right answer is the first one. Over the long term, a stock price will reflect the real value of the company. Over the short term though, it’s often tainted by whatever happens to be going on in the world at the moment.

And if the thought of further losses doesn’t make you happy, know that time cures all. The war will end. Inflation will settle down. Mr. Market will eventually continue the climb upwards.

Stay the course.

More 1500 Days!!!

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