4. Use the Market, Don't Rely on It

  • Market prices only reflect opinions- not underlying value. Markets are emotional, irrational and therefore provide opportunity.


Remember that market prices only reflect the market’s ‘opinion’ about valuation- they don’t tell you anything about genuine underlying value. Short term market movements are driven by sentiment and investor flows, while over the long-term share prices will track closer to genuine underlying value, as the impact of earnings growth (or declines) outweighs sentiment. The market can only be exuberant about a company for so long before that company has to actually deliver and generate some earnings (think 2000 tech bubble), and conversely, the market can only be negative about a company for a short period if that company continues to grind out excellent earnings growth (think the S&P recovery since 2009). At some point, the market has to accept reality. This is why we, as investment managers, are happy to maintain positioning even when the market or ‘styles’ may be moving against us. Over the long term, those features become irrelevant.

As a result- prudent investors should look to the market to provide them opportunities to transact in certain assets, but not look to the market to provide them with any reliable information about valuation.


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