Market Conditions & Investment Decisions

Q: What market conditions – separate from factors specific to any individual business – matter the most when deciding where to invest?

Over the past year, I’ve talked about numerous market conditions – inflation, interest rates, labor, supply chain – that are noteworthy for investors. These are all issues that are extrinsic to or separate from any individual asset I’m considering.

But just how much attention do I pay to such factors? Not much. It’s just not a guiding variable in my buying decisions.

At the end of the day, investors can fall into a lot of traps if they start flooding their evaluation of a stock with every single possible factor that can affect value, no matter how indirectly or distantly. That can make a decision that should be relatively simple (“I want to buy X kinds of companies”) intensive and complex instead.

Part of the problem with setting one’s compass by market conditions is that, depending on which variable you're weighting on any given day, you could go into a thousand different direction. That’s not the healthiest way to manage money over the long-term. In fact, being overly reactive to “market conditions” regularly causes a lot of people to short-circuit great ideas that might do well over a long time. They sell when they should hold, or vice versa, because they’re reacting to something separate from the inherent value of the position.

Consider the 52-Week High/Low. This is the highest and lowest price at which a security has traded over the previous 52 weeks, and the sheer spread can be shocking. Amazon’s 52-week high/low, for example, ranges at the time of this writing between $102.31 and $184.80. That’s an 80% difference in value! Yet Amazon’s inherent value hasn’t shifted by 80% over the past 52 weeks. And that’s not even the most dramatic spread I’ve seen.

The other issue with trying to gauge investments by market conditions is that predicting either the market or the larger economy is a loser's game. Economics as a field of study is hugely valuable for understanding market forces and how the production, distribution, and consumption of goods and services works. But predicting the future? Even trained economists are notoriously bad at predictions and forecasts.

What I want to bank on from a decision-making perspective is finding ways to understand the DNA of the company itself. I want to understand what they’re doing to create success and figure out if their approach is sustainable over time. I wouldn't do something, or not do something, because some external market factor was one way or another.

I’m not saying investors should operate in a vacuum, but the market is efficient enough that by the time there's worry about inflation or labor or a recession, the market has probably already priced those market conditions in.

To quote famed value investor Warren Buffett: “The stock market is there to serve you and not to instruct you.”

That's how I look at it: in general, market conditions are more important to the question of when to buy rather than whether to buy. If I identify a company that has wonderful attributes, but it’s overvalued, it’s not a good buy right then. At that point, it goes on my waitlist, and I essentially wait for the market to give me an opportunity. My job is to make sure I know where to allocate capital once there’s a price decline driven by market overreaction. That's where I can create the most value.