The value of all the publicly traded companies in this country is called, in industry terms, our ‘total market capitalization’. Currently, that number is $23,634,700,000,000 ($23 trillion). I think you would agree that’s a pretty sizable figure, so we’re going to talk about it here to elucidate a point.
First, how you derive that number is quite easy. You take (a) all the shares that owners of any one company possess, and (b) you multiply those individual shares by the currently traded price for that stock on one of the exchanges, and (c) you add up all the shareholders. That’s it. Early elementary school math stuff.
Secondly, and far more important, is knowing what that value represents. Mathematically and by commonly accepted theory, it is the composite figure of all the future earnings that company (or this group of companies) is to generate over their lifetimes, but ‘discounted’ to make those future anticipated dollars appear in terms of dollars TODAY – i.e. right now. It is very much akin to the old Popeye cartoon where Wimpy says “I’ll gladly pay you next Tuesday for a hamburger today”. We know what a hamburger costs, so we try to figure out whether the ‘next Tuesday’ deal looks like it’s worth the cost of shelling out the burger today. Regulated stock exchanges (NYSE, American, London, the NASDAQ, etc.) are where we exchange the burgers. One person buys, one person sells. There is no such quixotic thing as the term ‘buyer’s market’ or ‘seller’s market”. They markets are in equilibrium at any point in time.
So why does this matter? The answer is because when the market dropped ~40% in the 2007 / 2008 period, and pandemonium was evident everywhere, was it rational to assume that Coke Cola had their long-term ability to sell cans of coke diminished by nearly half? Were their established distribution channels and their immensely loyal customer base disappearing?? Was this 116 year old company seeing its manufacturing plants eliminated, such that buildings that had existed 2 years suddenly were worth a fraction of that value? No, you logically and calmly say as you read this piece, but we want you to think of what feelings you had then. Why this is important is because being a good investor is hard. It’s not nearly as hard when things are going up, as they are going down, but you need to look at the market with the same steely eye and keep emotions at bay.
Before we leave this subject, let us point out one other important investor fact. The return of any one stock, any one company’s valuation, is fundamentally the same return as the overall market (call it 6 – 10% per annum, depending on the asset class). HOWEVER, the volatility of any one stock is THREE TIMES the volatility of the market. Thus, a related logical question would be; why would I, the holder of an individual concentrated stock, want to take three times the risk to get the same returns as the other guy? It formerly might have been because you knew something the other guy did not, or your-guy-knew-a-guy that brought you insight into that company that no one else possessed. With the current SEC laws on the proper disclosure of public information since 2000, we would not want to make that bet. Further, as quoted below by Benjamin Graham, one of the most highly regarded and seminal investors of all time (who taught Warren Buffet), he would not make that bet even 40 years ago;
“I am no longer an advocate of elaborate techniques for security analysis in order to find superior value opportunities. This was a rewarding activity say, forty years ago when our textbook Graham and Dodd (Security Analysis, 1935) was first published. But the situation has changed a good deal since then. In the old days any well-trained analyst could do a good professional job of selecting undervalued issues through detailed studies. But in light of the enormous amount of research now being carried on, I doubt that in most cases such extensive efforts will generate sufficiently superior returns to justify their costs.”
—Benjamin Graham, shortly before his death in 1976
Therefore, we conclude that a group of people is smarter than any one person when talking price. We conclude that way too many financial industry ‘experts’ talk overconfidently about the price of a stock when they should instead be talking about the value of investing well. I conclude that protecting oneself from taking on too much risk is worth just as much or more than talking about possible annual returns.
We conclude if you do all the above, you will be better off than 90% of all investors. That’s exactly where were going.
