Do I Own a Market?

It’s an important distinction that we as investors need to get correct in our minds.   Do I own a “market” or a collection of businesses?  All too often, investors fall into the trap of thinking that the market is a beast that is prone to violent swings that is too scary to tangle with.  While the “market” is absolutely volatile, when you break it down to what it actually is, it seems easier to comprehend.

The market is not in itself an entity.  The market does not exist as a thing, it is a place.  The marketplace does exist, which are thousands of businesses that are listed on a public exchange and available for purchase.   It’s an amazing place where ordinary individuals can purchase ownership in these businesses and own shares of the returns that these companies generate.  We invest our capital in companies that are available in a central location.  We do not invest in the “market”.

The problem is that some on Wall Street, cable news shows, and others spend an indordinate amount of time creating a persona about the market.  Many spend time describing the market as a “bear” or a “bull”, or note that the market is “tired”, or perhaps is a “bubble”.

Nobody describes any other market place like that.  Have you ever heard somebody give those personas to a supermarket ?  People treat a supermarket like what it is, it’s a place where you go to purchase goods.  In an investor’s case, those goods happen to be ownership of businesses.

What is different is that in the investing marketplace, the prices change by the second.  In other market places that is never the case.  Can you imagine going to the supermarket and getting a basket full of items and your banana’s jumped by $1 by the time you checked out?  What really changed with the bananas between taking them out of the produce section, and getting them to the checkout?  Would you look at a historical chart of banana prices to find the best time to buy them and buy a cart full?  Of course you wouldn’t, it would be ridiculous.

What really changes with a company such as Union Pacific on a minute-by-minute or even a daily basis?   Sure, they may have major news that day, but what about the other 364 days a year?  Because of the disclosure rules and publically disseminated information, aren’t we all looking at the same set of numbers, facts and environment?  We are, but many are interpreting the same data very differently.  This leads to daily fluctuations.

Different opinions on the same information is good for the market as it aids in getting the correct value for the company.  The sum of everyone’s collective interpretation of the data is probably a reasonable estimation of the worth of that company at any particular time.

The point is, that we shouldn’t look at the market as an entity that is moody on a daily basis.  At the end of the day, we as investors own companies that produce things, and most importantly produce profits.  So, the next time you see the next 300 or 400 point day on the Dow (up or down!), ask yourself what really changed with the businesses I owned that day?  Chances are, much less than the market moved.

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