The market is up a lot; it is expensive. Should we be selling? This is the number one question we’ve been getting from clients. So, should we?
We’ll give you several answers. We agree that the market is expensive. In fact, a few months ago we compared the euphoria and speculative mood of the market to the one in 1999. Back then, many stocks got so expensive they weren’t being valued on earnings, but on eyeballs.
Today, just like then, some high-flying names don’t have any earnings. The ones that do are valued on price-to-sales, because a price-to-earnings of 250 carries as little informational content as a 170 or a 500. Yes, the market is expensive and extremely speculative – but we don’t own the market. We own a portfolio of individually analyzed and still significantly undervalued companies.
To frame this discussion, I’d like to share an excerpt from the book I am working on. Just between us, it will be called Soul in the Game and will come out sometime in late spring 2021, published by Harriman House. If you would like to read an early draft and help me hunt for typos, let Barbara know at pa [at] imausa [dot] com and she will send it to you in a few months.
In ancient Greece and Rome, parents took their kids to study oratory skills from teachers called Sophists (the word sophisticated has sophist as its root). Sophists focused on the art of persuasion through both emotion and reason, and kids were taught to argue both sides of an argument. Stoics, on the other hand, put the emphasis mainly on reason (not emotions) in their communications.
The Sophist’s oratory skill was like a spear; it was a powerful weapon that could be used for good or for evil, thus students needed the morality taught by philosophy to know where to point it.
Stoics were extremely cautious about the Sophists – they thought the words you use to persuade others matter, since in persuading others you may impact your own thinking. In the attempt to persuade others through an appeal to their emotions, we use colorful metaphors; we dramatize the words we use. If we had two brains, one to talk to others and one to talk to ourselves, we’d be fine. But that is not the case; thus our words may turn on us and impact our own emotional state.
It is almost as though Stoics would not want to use the colors available in the rainbow to express their opinions but resort to only black and white. However, I see the value of their thinking. We need to examine the words we use when we communicate with ourselves. When something stirs up negative emotions inside us, we need to be careful when we describe the problem to ourselves. We want to make sure we are not being Sophists against ourselves.
The best way to do this is to write it out. When you lay each word on the paper, examine it. Instead of “My husband drives me insane,” you write, “My husband says the following … that upsets me.” (I am not quoting from my wife’s journal; I am reading her mind.) Instead of “The stock market collapsed,” write “The stock market declined X%.” Epictetus said something along the same lines. Instead of saying “Our ship is lost far at sea; we’ll never get home,” he suggested we go with “We are at sea, and we don’t know where we are.”
We take fancy words, string them together, and add dramatic, superfluous colors. Instead of calling a dish Basel Honey Glazed Wild Alaskan Salmon, Marcus Aurelius might suggest we describe it as “the dead body of a fish, with herbs and honey.” He writes, “Just in the same way we should act all through life, and where there are things which appear worthiest of our approval, we should lay them bare and look at their worthlessness and strip them of all the words by which they are exalted.”
We need to pull the fancy outer layer off our problems and strip them to their bones. Instead of “my life is horrible,” you create a list of things in your life that bother you, spelling them out as plainly as possible (don’t use big, colorful words; leave those for the Sophists).
A client called me. Let’s call him Todd, because that is his real name. He was somewhat confused on what to do. He explained, “Our stocks are up. The market seems to be crazy. There is rampant speculation everywhere. I am really concerned for our portfolio.” I told him the above story about the Sophists and Stoic Philosophers. We agreed that instead of focusing on the market – an ambiguous organism with thousands of stocks – we should really zoom in on one stock at a time, and then we’d see that our portfolio is not full of insanely valued, speculative stocks that are used as casino chips by Robinhood traders. Rather, it’s a diligently constructed collection of high-quality, significantly undervalued businesses (30- to 50-cent dollars).
I broke our portfolio down to “dead fish” basics, and we discussed our largest positions in thoughtful detail, just the way we would in a seasonal letter. Todd was relieved – the undramatic, black and white language of stoicism helped him see that there is a lot of value in our portfolio. Just as I see value in stoic philosophy when analyzing and valuing companies.
I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).
In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”
I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).
And if you prefer listening, audio versions of my articles are published weekly at investor.fm.