The Wrong Questions Unanswered

U.S. stocks have performed well recently because global economic fundamentals are sound and corporate earnings are strong and potentially getting stronger.  But what is the market going to do from here?  Will it go higher?  Is the market overvalued? Is there a big sell-off coming?   Those are the questions everyone wants answered.  Unfortunately those are probably the wrong questions to be asking.

In the near-term, market gyrations are impossible to predict and are truly only relevant to market speculators and those invested in the market as a whole, e.g. index funds.  On the contrary, your investment portfolio is made up of select companies chosen for their low market prices relative to their expected future earnings stream.  Prices of stocks may go up and down in the near-term, but what really matters is the earnings potential of the companies themselves.

As renowned investment manager Peter Lynch wrote many years ago, “What makes stocks valuable in the long run isn’t the market; it’s the profitability of the shares in the companies you own.”  In other words, the prices quoted on the stock exchanges are not as important as the expected earnings power of the individual companies in which we invest.  Group W endeavors to identify stocks that are likely to have steady earnings growth and are trading at reasonable valuations.  As demonstrated by Peter Lynch and many others, this has proven to be a winning formula.

Another quote from Lynch: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves."

The upshot is: we should spend less time worrying about what the market is going to do, and focus on the earnings potential of the companies we own.

Frederick Maxted - Group W Investment Management LLC                                                                                                                                                     1 October 2017