Stock Market---Oversold or Undervalued?

Jeff Karp |

Download PDF Version

On occasion, I will fuel my home remodeling hobby with an episode of the TV show-Love it or List It.  The premise is based on a family that lives in a house that does not meet their needs so a realtor comes in to show them other options while a home remodeler attempts to “fix” their house to get them to stay put.

For me, the frustrating part of the show is when the realtor has clearly found a superior solution to the re-model option and the family stays put anyway.  Why would they do that?  The reality? Emotions overwhelm logic most of the time.

Think about it—the biggest decision we ever make is with whom we choose to spend the rest of our lives.  How many people do a risk analysis paired with a financial analysis to determine the long-term value of the decision?   I realize I am taking this to an extreme, and it is to make a point. The point is emotions make most of our decisions for us, which is fine in many cases, but not in investing.

Emotions can cause the average investor to buy stock in a company that they know nothing about and should not own, or to buy a good company at too expensive of a price.  Neither of these situations work out well.  The extreme stock market swings of 2020 are a perfect example, proving my point. 

The stock market indexes, in general, started the year with a bang, setting new all-time highs by mid-February, only to crash, due to the outbreak of COVID-19.  Without almost any good news, the same stock market indexes turned around, regaining most of the drop from COVID. 

If your investments are in the stock market, all of this may matter to you.  If you are investing in individual companies, then does this really matter?  If you know that the company you have invested in

has a solid management team, with products/services that are not easily copied or obsoleted, with a solid balance sheet (low debt) and you buy their stock at a reasonable price, does volatility in the general stock market present a problem or a buying opportunity?  The short-term stock market swings are basically daily emotional guesses on what the future holds.  Longer term investing should be decisions based on analytics/research. It is not a popularity contest. 

The above being said, it’s not easy.  Then again, most things worth doing never are easy.  You worked hard to earn your financial success.  If investing is not your expertise, then hire someone to help you and remember to ask questions and get answers that make sense to you.  Something as simple as “Why do you like that investment and how does it help me achieve my financial goals?” is a great one to start.

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”   Ayn Rand