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Pay Attention to the Market’s Trend – Not Its Value

There’s no shortage of opinions on stock valuations these days, but instead of listening to them, pay attention to the market itself.


At times, I feel many of my fellow investment gurus/pundits/experts would do well to remember a certain quote from investing legend Jesse Livermore:

“Markets are never wrong, only opinions are.”

Jesse Livermore is an investing legend who, in the early 20th century, pioneered day trading and who was the basis of the best-selling Edwin Lefevre book, Reminiscences of a Stock Operator – considered by many to be the investing Bible. And I think that quote is as relevent as ever and is important to remember in bull markets like this one.

Experts and analysts have no shortage of opinions about where the market is headed next, but as with all opinions, they’re at best educated guesses. Nobody knows where the market is headed in the future. It’s why we jokingly say “our crystal ball is in the shop.”

It seems every time there’s a bull market, and share prices are “overextended” according to certain valuation metrics, every dyed-in-the-wool value stock expert turns into Dean Wormer railing against those rule-breaking rapscallions from Delta house in the movie Animal House.

“They can’t do that!” these fun-killing party poopers often rant. “Stocks are WAY too overvalued at these prices. They’re due for a major comeuppance!”

I’ve heard some version of that opinion dozens of times in my 13 years in the investment business. And those opinions are almost always wrong, at least in the short term.

Sure, the market never goes up in a straight line, so eventually the Wormers are right, the same way a broken clock is still right twice a day. But think of all the profits people miss out on – value investors in particular – from sitting on the sidelines, shaking in their boots out of fear of a market pullback that could happen.

Invest in the Trend, Not the Valuation

I prefer to strike while the iron is hot and invest where the market winds are blowing. And right now, the market is at all-time highs, and traditional growth stocks – i.e., the tech stocks and other upstarts that populate the Nasdaq, up nearly 20% year to date – are thriving. In fact, growth stocks have been outpacing value stocks for the last decade.

Along the way, certain value investors have scolded growth stocks for having the audacity to keep rising well beyond what their valuations suggest they should – like Dean Wormer tut-tutting a Delta pledge for being “fat, drunk and stupid.”

Sometimes, stocks act like fat, drunk and stupid frat boys, behaving unreasonably and debaucherously, and partying longer than that “should.” But investors don’t make money on woulds and shoulds; they profit from what actually happens. Thus, no amount of scolding is worth a fig if the market just keeps rising, callously ignoring all the opinions that it “should” pull back.

To quote another investing legend, my old boss Tim Lutts, Cabot’s version of Jesse Livermore: “Trends on Wall Street last longer than anyone expects.” Yes, the trend toward growth stocks has lasted longer than anyone expected, more than a decade now. If you’ve been holding out for better values, you’ve mostly missed out.

Don’t make the mistake of holding out for better values. Go with the market’s tide, and search for either growth or, if you’re a value investor, growth at value prices. The market may be fat and drunk, but it’s not stupid.

Markets are never wrong. Opinions are. Remember that.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .