I saw a tweet yesterday. It was from the respected magazine, The Economist.
Tell me if you can see what's wrong with it:
"Having nearly fallen below $1trn in November, its market value is back up to $1.7trn. Crisis over? We consider the tech firm's future as it turns 25"
The company in question? US tech giant Alphabet, the company better known as Google.
Now, before we go on, I own shares, so there's that.
But my critique has nothing to do with the company that's the subject of the tweet.
Instead, it has everything to do with the fact that far too many people – including people who should know better, like the good people at The Economist – still persist in assuming the market is right.
And that somehow a gyrating share price is either evidence of a crisis, or that an imagined crisis is now over.
Let's get the facts out of the way, first.
In late 2021, the market capitalisation of Google was close to US$2 trillion.
(If you're coming in late, the market capitalisation is calculated by taking the share price and multiplying it by the number of shares. It kinda tells you how much the whole company would theoretically cost if you were to buy the whole thing.)
In November 2022, around US$1 trillion.
Now, in August 2023, back to US$1.7t, as the tweet points out.
Now, I have a question for you:
Is it really likely that the market was right at all three points?
That a company with the size and profitability of Google was actually worth $2t, then $1t, and now $1.7t?
In the space of less than two years?
A trillion dollars of market value disappears? And then $700 billion reappears? And we say 'Well, that seems okay'.?
I mean, things might have been going stonkingly well, then abysmally, then very well, indeed.
But even then, a share price is supposed to reflect a share price from here to eternity.
So when the market slashed $1t from the company's market cap, it was essentially saying 'Google will be half as profitable – forever – as we assumed only a year earlier.
Well, now its entire future will be 70% more impressive than the market thought only 9 months ago.
Remember, we're not talking about some speculative miner, or biotech hopeful here.
This is Google, one of the largest companies on the US market – and in the world.
Now, the market being this silly is great news for people who like to find stock market bargains.
When investors, en masse, get unduly pessimistic, that can throw up some great opportunities.
So that's good.
But when respected mastheads like The Economist (and many, many other people and mastheads, besides, by the way) get sucked into talking about companies as if the jittery, conviction-free, short-term-focussed, market has anything to tell us… well, they're doing the rest of us a disservice.
There are already too many people who buy shares one day, then when they fall the next day (or week, or year) start to worry because 'the market' is telling them something.
The problem is that most of the time the market is telling you about its mood… not its ability to correctly price companies.
Or, as Warren Buffett puts it:
"…you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
"Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favourable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
"Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behaviour, the better for you.
"But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence."
I don't really blame The Economist. Not too much, anyway. Their language and approach is very, very common.
But, as Buffett points out, that doesn't make it right.
Indeed, inverting your thinking 180 degrees, and looking for when the market is wrong, is precisely what Buffett tries to do.
And what we should try to do, too.
There was no crisis because Google's valuation fell 50%… other than for people who slavishly follow the mood of Mr. Market.
The trick – as The Economist seems yet to learn – is remembering Mr. Market is more emotionally volatile than a 3 year old.
Which, as any parent will tell you… kinda puts it in perspective, huh?