Valuation is Not the Answer

By Al Thomas

Every day I hear from the “experts” on CNBC-TV and the radio gurus that the way to buy stocks is find value. One man’s Rembrandt is another man’s connect-the-dots and fill in the spaces. Valuation is like beauty. It is in the mind of the beholder.

If valuation is the key to buying stocks then there should be some kind of a formula to determine what is undervalued and over-valued. In every industry there are formulas for standards of performance. For cars we want to know the zero to 60 miles per hour in how many seconds. For soap we want it to be 99 and 44/100 percent pure. For alcoholic beverages it could be how long it has been aged. And on and on.

Yet in the stock market we have no hard and fast set of rules by which to judge a company performance. Ah, and there’s the rub! No matter how good a company performance might be it may have no bearing on the price performance of the stock. You can find good companies that are within a sector that is doing poorly and yet one company can be making huge profits and sales, but the stock price is going nowhere. There need not be any correlation.

When you are in a bull market almost every stock goes up – even the dogs. When you are in a bear market almost every stock goes down – even the best ones. We ended an 18 year bull market in 2000 and almost without exception every stock headed for the exit until 2003.

Bull and bear markets follow relatively standard patterns of about 16 to 18 years up and 16 to 18 years down and the valuations go right along with them. If an investor owns stocks or especially index funds during the bear periods he will be lucky to have broken even at the end of the cycle. Cash in the mattress will outperform market returns while the bear is in charge.

During bear times there will be periods when the market will have a nice advance that can last for many months leading investors to believe the bull has returned. These intermediate rises can ultimately bring many investors back into the market only to lose it when the rally is over and true valuation returns.

During any historical 10-year stock market period there has always been a bear market. Many of them have hurt investors with losses of 40% and more. No one knows when the next bear will come out of his cave to ravage stock investors. There can be many reasons for a sharp or sustained market break that may be apparent, but the market continues to advance. Logic does not give the answer.

Individual investors or their money managers must have an exit strategy. Without a solid plan they will lose again as they did in 2000 and 2008. Investors must ask their money managers and financial planners what they will do when the next bear appears. If there is no solid strategy a different manager should be found immediately. Without it profits and principal will disappear.

No one knows exactly where the top or bottom of a market move will be. Have an exit strategy in place at all times.

Copyright 2013 Williamsburg Investment Co. All rights reserved. Al's new ebook (32 pages) is available on for 99 cents. It explains the Golden Cross and the Death Cross. These are well known methods of determining long term trends in the market. If you only learn one method of technical analysis this would have kept you out of the 2000 and 2008 crashes and will keep you out of the next one that is coming soon. The title is Never Lose Money In The Stock Market Again.