“Markets are never wrong, only opinions are.” – Jesse Livermore
Few quotes related to investing have stuck with me more than that one.
Jesse Livermore, of course, is an investment legend, who in the early 20th century pioneered day trading and who was the basis of the best-selling Edwin Lefevre book, Reminiscences of a Stock Operator – considered by many to be the investing Bible. Many of his words are relevant to today’s market, nearly 85 years after his death. And I think the above quote is as evergreen as any, and is important to remember in bull markets like this one.
No one know where stocks are headed next. Not today, not in a week, not in a month, not in a year. We often make educated guesses about where stocks might head next – though as we often say here at Cabot, our “crystal ball is in the shop” – but in the end, they’re just guesses – opinions. And opinions, as Livermore aptly noted, are often wrong. The market never is.
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At times, I feel many of my fellow investment gurus/pundits/experts would do well to remember that. And that especially goes for the value investing experts.
It seems every time there’s a bull market, and share prices are “overextended” according to certain valuation metrics, every dyed-in-the-wool value stock expert turns into Dean Wormer railing against those rule-breaking rapscallions from Delta house in the movie Animal House.
“They can’t do that!” these fun-killing party poopers often rant. “Stocks are WAY too overvalued at these prices. They’re due for a major comeuppance!”
I’ve heard some version of that opinion dozens of times in my 13 years in the investment business. And those opinions are almost always wrong, at least in the short term.
Sure, the market never goes up in a straight line, so eventually the Wormers are right, the same way a broken clock is still right twice a day. But think of all the profits people miss out on – again, value investors in particular – from sitting on the sidelines, shaking in their boots out of fear of a market pullback that could happen.
Focus on the Trend, Not the Value
I prefer to strike while the iron is hot and invest where the market winds are blowing. And right now, the market is at all-time highs, and traditional growth stocks – i.e., the tech stocks and other upstarts that populate the Nasdaq, up nearly 12% year to date – are thriving. In fact, growth stocks have been outpacing value stocks for the last decade, 13.2% to 7.8%, on an annualized basis, as detailed by my colleague Brad Simmerman earlier this week. Along the way, certain value investors have scolded growth stocks for having the audacity to keep rising well beyond what their valuations suggest they should – like Dean Wormer tut-tutting a Delta pledge for being “fat, drunk and stupid.”
Sometimes, stocks act like fat, drunk and stupid frat boys, behaving unreasonably and debaucherously, and partying longer than that “should.” But investors don’t make money on woulds and shoulds; they profit from what actually happens. Thus, no amount of scolding is worth a fig if the market just keeps rising, callously ignoring all the opinions that it “should” pull back.
To quote another investing legend, my old boss Tim Lutts, Cabot’s version of Jesse Livermore: “Trends on Wall Street last longer than anyone expects.” Yes, the trend toward growth stocks has lasted longer than anyone expected, more than a decade now. If you’ve been holding out for better values, you’ve mostly missed out.
Don’t make the mistake of holding out for better values. Go with the market’s tide, and search for either growth or, if you’re a value investor, growth at value prices. The market may be fat and drunk, but it’s not stupid.
Markets are never wrong. Opinions are. Remember that.
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