Research Articles

Mr. Valuation disagrees with Henry Blodget: "It's a Market of Stocks" is not a Meaningless Phrase

Chuck Carnevale - Thursday, April 16, 2015

Introduction

There are many that consider the stock market the big casino.  Because I believe in adhering to a business perspective on investing in common stocks, I am not one of those people.  To investors like me, the stock market is simply the store that we shop at in order to buy (invest in) great businesses.  Consequently, I have trained myself to be stock market agnostic.  Since I do not like to gamble with my money, the big casino, short-term-oriented, active-trading-mentality does not appeal to me.

Although I cannot say with absolute certainty, anecdotal evidence suggests that long-term “invest in the business and hold” investors may be in the minority.  My minority status thesis certainly seems to be supported by what is most commonly offered on most financial media outlets such as CNBC.  The financial press, especially on television, is clearly focused on reporting and discussing short-term price volatility.

Every day we hear how the markets are up or the markets are down today X percent, but there is very little discussion or coverage about intrinsic value.  As I previously admitted, I may be wrong about that, but it sure seems to me that the financial media tends to pander to the active, shorter-term focused trader mentality.  As a result, it appears to me at least, that the conservative long-term investor is somewhat neglected.  Since the media is primarily rewarded based on ratings, it seems logical to conclude short-term market players are where the action must be.

Frankly, I find this disturbing because I believe that it supports and even promotes a more speculative approach over a more prudent and conservative long-term approach to investing.  The reason I am disturbed is because much of my writing is oriented towards investors in or near retirement, and I believe that the more prudent and conservative long-term approach to investing is most appropriate to those kinds of investors.

16 Meaningless Market Phrases That Will Make You Sound Smart On CNBC

Therefore, I was quite gratified when a reader of one of my most recent articles found here posted a comment with a link to an article in Business Insider by renowned financial blogger Henry Blodget, cofounder, CEO and Editor-In-Chief found here that challenged some of the dribble that commonly propagates the financial media.  The article was titled “16 Meaningless Market Phrases That Will Make You Sound Smart On CNBC.” 

I loved the article and I am in total agreement with 15 of the 16 meaningless market phrases that Mr. Blodget exposed.  Actually, I am in agreement with all 16 of the phrases that were exposed if they are applied to the short-term mentality that I discussed above.  Like Mr. Blodget, I feel these phrases are meaningless because they are typically vain attempts to sidestep ignorance on the part of those that love to spout them. 

The truth is, when they all relate to short-term market price movement, they are profoundly misleading.  Since I strongly believe that no one can predict the short-term price movements of the market, or individual stocks for that matter, I believe these catchphrases are thrown out as attempts to cover up the reality that those stating them simply in reality have no clue.

Additionally, and apparently like Mr. Blodget, I believe that all of the meaningless phrases he was exposing universally relate to the short-term trading mentality, except one.  To be clear, I am saying that there is only 1 of the 16 meaningless phrases that can be appropriately utilized and applied by the prudent long-term investor. 

And frankly, when it is properly applied from a long-term business investing perspective, I believe it is one of the most meaningful and vitally important concepts that the prudent long-term investor can have.  So much so, that I believe that every prudent long-term investor should start out every investing day by chanting this long-term investing and quite meaningful phrase, as I personally do.

It's Not A Stock Market. It's A Market Of Stocks

The phrase “It's not a stock market. It's a market of stocks” is extraordinarily meaningful and I argue quite profound to the long-term business perspective investor.  It’s important because it empowers the prudent investor to take their focus off of short-term stock market volatility, which is unpredictable and therefore unknowable, and instead place their focus on the merits, benefits and future potential of the individual businesses that they personally are partnering with.

 In the long run, the stock market has very little to do with the results that a shareholder of a great business will earn.  In the long run, the successful operating results of the individual business invested in will drive shareholder returns.  Consequently, prudent long-term investors should not be worried about what the market may or may not do in the short run, but they should be very concerned about the future operating performance of the businesses they are invested in.  Common sense would indicate that their future returns will be a function of the success of the business they are owners of, and independent of the overall stock market.

Here is the excerpt from Henry Blodget’s article where he talked about: "It's not a stock market. It's a market of stocks.”  This is one of my favorite and meaningful phrases for the long-term oriented investor.  But clearly, Mr. Blodget was critically citing this phrase from a short-term perspective, which is clear if you read his statement carefully.

"It's not a stock market. It's a market of stocks.

When to use it: Anytime.

Why it's smart-sounding: It sounds deeply profound--the sort of wisdom that can only be achieved through decades of hard work and experience. It suggests the speaker understands the market in a way that the average schmo doesn't. It suggests that the speaker, who gets that the stock market is actually a "market of stocks," will coin money while the average schmo loses his or her shirt.

Why it's meaningless: Because it's a statement of the obvious. Of course it's "a market of stocks." But it's also a "stock market." And viewing the stock market as a "market of stocks" doesn't help you in any way, other than reminding you that all stocks don't move up and down the same amount.”

However, when this phrase is more appropriately referenced from a long-term perspective, it provides an extremely meaningful and important principle and perspective.  It’s not just about whether or not a stock might move up or down relative to the market, instead, this phrase is really about understanding the many important and numerous differences between the companies that make up the overall market.

My primary point being that there are common stocks of companies within the market that dramatically outperform the market over time, some that underperform the market over time, and everything in between.  Some of these performance differences are so extraordinary that it should become obvious that it is not the stock market that truly drives long-term returns.

Undoubtedly, over the short run, stocks will move up and down in relative concert with what the market is doing.  However, longer-term, the truly great businesses separate themselves from the pack in extraordinary ways.  Conversely, the same is true with very poor or weak businesses.  They also separate themselves from the pack, but usually in the wrong direction.

In order to more clearly illustrate my point, I offer the following examples of companies great to bad and in between, that generated long-term performance results that were dramatically different than the market.  In each case, you will see a clear correlation between each company’s operating results and its stock performance over time.

Additionally, although I am only offering a few examples, the reader should be aware that thousands could have been presented.  Moreover, as the reader examines each of these performance reports, I suggest that they ask the following simple question.  What did the long-term performance of the stock market have to do with the long-term performance of each of the example stocks presented below?

Admittedly, in each case I am presenting extreme examples in order to make my point.  But as you study the performance, especially the performance of the extraordinary companies, it should become crystal-clear that the stock market had little or nothing to do with the returns that the long-term owner/ shareholders of these companies received.  Caveat: I am not recommending any of the sample companies presented below, they are offered solely to illustrate the relevance and importance of the phrase: it’s a market of stocks and not a stock market.

Which brings me to another one of my favorite clichés, and I submit, meaningful investment phrases: The stock market really has nothing to do with investing - in the long run.  Consequently, it logically follows that the obsession with the stock market that many people have is misguided.

The S&P 500 as a Baseline Benchmark

In order to establish a baseline or benchmark to compare against, I offer the following earnings and price correlated F.A.S.T. Graphs, followed by its long-term performance history on the S&P 500 index.  As an aside, anyone interested in accessing a live F.A.S.T. Graphs on the S&P 500 can find it in my recent article that highlighted Emerson Electric found here.



Examples of Extreme Outperformance

The following examples of companies that have dramatically outperformed the S&P 500 over various timeframes are offered as clear evidence that it is not the market that generates long-term returns.  With each of these examples we see long-term earnings growth rates that are several times greater than the S&P 500.  This clearly illustrates how and why the businesses you invest in are significantly more important than what the overall market or averages are doing.

Admittedly, the following names are rare and clearly not normal or average.  However, the point of this exercise is to illustrate why the phrase “it is a market of stocks and not a stock market” is extremely meaningful.  What these extreme examples unmistakably show is that there is no correlation or relationship between how their shareholders were rewarded in comparison to the S&P 500 index.

Starbucks Corporation (SBUX) 10 Times Better Than the Market Since 9/20/1995

Cognizant Technology Solutions (CTSH) 49 Times Better Than the Market Since 12/31/1998

Google Inc (GOOGL) 5 Times Better Than the Market Since 8/31/2004


Keurig Green Mountain Inc (GMCR) 127 Times Better Than the Market Since 9/30/1996

The Priceline Group Inc (PCLN) 83 Times Better Than the Market Since 12/29/2000


Old Dominion Freight Line Inc (ODFL) 17 Times Better Than the Market Since 12/29/1995

 

Biogen Inc (BIIB) 32 Times Better Than the Market Since 12/29/1995

Apple Inc (AAPL) 23 Times Better Than the Market Since 9/29/1995


Visa Inc (V) 2 Times Better Than the Market Since 13/31/2008

Amphenol Corporation (APH) 10 Times Better Than the Market Since 12/29/1996


Slow Growth High Yield Example:

Southern Company (SO)




Extreme Underperformers

Extreme underperformers versus the S&P 500 illustrates the true meaning of the phrase “it’s a market of stocks, not a stock market” just as well as the extreme outperformers did.  When you examine their performance you find a group of companies with dismal performance in a rather good market timeframe.  Once again proving that it is not the market that drives returns, it is the business results of the individual companies.

Avon Products Inc (AVP)


Grandparents.com Inc (GPCM)

Xerox Corporation (XRX)


Summary and Conclusions

I am a firm believer and ardent supporter of sound and prudent investment management.  To me, that implies making investment decisions based on relevant fact-based principles.  Consequently, I don’t believe that opinion, hunches or emotion are appropriate, especially when dealing with important money.  With this said, I found Henry Blodget’s exposé of meaningless market phrases excellent, and even important work.  He placed an important spotlight of reason on most of the meaningless phrases he highlighted.

Furthermore, when looked at from the perspective of short-term market timing, I think his critique of what is one of my favorite phrases was also spot on.  However, when looked at from the perspective of the prudent long-term investor, the phrase “it’s a market of stocks, not a stock market” possesses profound meaning and important investing insights.

In my opinion and experience, people tend to be too focused on what the stock market might or might not do in the near future.  Nobody can know for sure, and this focus on the market can be problematic in several ways.  It can encourage people to be afraid to invest and therefore lose out on good opportunities, or encourage them to be too aggressive and take on too much risk.  Therefore, I favor basing investment decisions on the specific investments in question.  In other words, I believe in focusing on the merits of the individual companies that I am interested in investing in.

Stated more plainly, I am interested in each individual company’s current valuation in relation to a rational expectation of future operating results.  Whether the overall market is overvalued or undervalued is nowhere near as important to me as to the valuation and prospects of the individual company or companies I am focused on.  From what I presented above, it should be clear that performance results come from business results, and not from what the stock market is doing or has done.

The meaningful phrase “it’s a market of stocks, not a stock market” stands as a continuous reminder to me to focus on what’s important while ignoring what’s not.  Since I do not invest in the entire market, I spend no time worrying about it.  Instead, I spent all my time and effort evaluating the specific investments that I am actually invested in.

Disclosure:  Long CTSH,GOOGL,AAPL,V at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.


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Testimonials


“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

(Wish I could be) Long FAST Graphs!!!”


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“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


“Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


“Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”