Many people believe that the stock market is always correct, that it efficiently allocates capital based on the latest data and that every change has a rational reason. Just last week we had wonderful results from Nvidia and then received an overdue jobs report that was much better than expected; the market rose in the morning, then dropped like a rock. The pundits jumped in and quickly told us that Nvidia’s results were just too good and therefore proof that we are in an AI bubble, while the better-than-expected jobs report just means that the Fed will not lower rates. So good news is bad news. It all makes sense, right?
Wrong. As Nassim Nicholas Taleb pointed out in his book “Fooled by Randomness,” we are often fooled by randomness. (Taleb has wonderfully descriptive titles for his books.) Day-to-day activity in the stock market is random; people buy and sell stocks for all sorts of reasons. Index funds buy because they have to look like the index. People sell stocks to buy that house they wanted, pay bills in retirement, pay a tax bill, make charitable donations, and for hundreds of other reasons that have nothing to do with that morning’s economic news.
The market doesn’t get it right every single moment. To quote the wisdom of Agent K (Tommy Lee Jones’s character in “Men in Black”), “A person is smart. People are dumb, dangerous, panicky animals and you know it.” The market is made up of people. So, what are we to do?
I think Benjamin Graham said it best: “You are neither right nor wrong because the crowd disagrees [or agrees] with you. You are right because your data and reasoning are right.” Prudent investors cannot simply agree with the market all the time, nor can they just be contrarian and claim that it is always wrong. They must do their own work. What is actually happening at the companies whose stock we own? Over the last few weeks, the news has been good and the market reaction has been bad. These things happen in the short term; in the longer term, the market does do a good job of getting it right. Patience is in order.
It is Thanksgiving, and I am extremely grateful. In keeping with our tradition, here is my list:
~ I am thankful that we base our investment decisions on sound fundamentals instead of irrational short-term market moves.
~ I am thankful for our country, which with all its faults is still the best place to live.
~ I am thankful that college basketball has begun, and that Wake Forest is finally testing itself in the non-conference schedule.
~ I am thankful for all of my new team members at Gallagher and the bright future we have.
~ I am thankful my wonderful wife, who has fully recovered from last year’s hip replacement.
~ I am thankful for my son and my daughter, both of whom are growing into wonderful human beings.
~ I am thankful for my family, immediate and extended.
~ I am thankful for all of my friends.
~ Of course, I’m always thankful for Mama’s pumpkin cheesecake, though she is no longer here to enjoy it. I don’t think she will mind me eating her slice.
~ Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital and now Gallagher is our greatest asset and we value it every day of the year.
Happy Thanksgiving!
Chuck Osborne, CFA
