It’s Not the Markets That Are Volatile… It’s People

Written by Jeff Helms

The financial world is complex and constantly changing. Those changes can impact our clients and their plans for the future. As the firms founder and Managing Partner, making sense of these changes is my job. We try to simplify communication on market dynamics to make it meaningful and useful for our clients.

June 28, 2023

In our recent reading, we ran across some pearls of wisdom from investment manager Howard Marks of Oaktree Capital. Marks ranks right up there with Warren Buffett as a voice to heed on investment philosophy. (He’s on Forbes list of billionaires.)  We thought we’d share his remarks to provide some perspective on market fluctuation:

 

“It’s clear from observation that security prices fluctuate much more than economic output or company profits. What accounts for this? It must be the fact that, in the short term, the ups and downs of prices are influenced far more by swings in investor psychology than by changes in companies’ long-term prospects.”

 

To his point – we turn back to March 2020 when the COVID winter started. In barely four days, the Dow Jones Industrial Average declined 6,400 points, an equivalent of roughly 26%. More simply stated, the 30 industrial stocks making up the Dow Jones temporarily lost 26% of their value. The above list of companies makes up the Dow Index.

The question for investors during this time was – “do I really believe that these companies lost 26% of their enterprise value in four short days”? To be sure, their stock prices declined that much. But did these companies really lose a quarter of their long-term value? The answer is – of course not. In fact, the Dow Jones not only recovered quickly thereafter but ended 2020 higher than it started at the beginning of the year. Smart investors – who had the foresight to ask themselves this question in 2020 – put more capital to work and benefited greatly from the recovery.

Our point here is that the stock market is very effective at pricing the value of companies over the long run, but it’s incredibly messy in the short run. That’s due to investor psychology. Markets get oversold in times of uncertainty due to emotion, not fact. We’re not sure when the next market downturn will occur, but when it does, we would encourage readers to ask themselves this question. “Do I really believe that this list of companies has really permanently lost x% of their long-term enterprise value”? If the answer is “no,” it likely presents an excellent opportunity to buy while markets are on sale.

 

 

The Dow Jones Industrial Index is an unmanaged portfolio and individuals cannot invest directly in the index.