Overshot

​By Brad Thomason, CPA
 
Today I’ll tell you a quick story which you might find interesting in light of everything that’s going on.
 
Back in 2007, when the market started declining ahead of what would come to be known as the Financial Crisis, I had an office in the same building as one of those executive office centers.  In fact, our suite of offices was just down the hall, and we frequently used the center when we needed a large meeting room, extra clerical help, access to high-volume printing, etc.  And that's where the coffee machine was.  So I was in and out of there a good bit, and as is the case with most office situations, had a group of folks that I routinely chatted with when we passed in the hall.
 
One fellow who had an office there was constantly asking me what I thought about whatever was going on in the market.  This had been going on for some time, but as stock prices started to fall, he would often ask more than once in a day.
 
As the decline really got in full swing, the Dow traded down through 8,000.  This would have been in October 2008.  The previous high-water mark had been about 14,200.  For some reason, I remember talking with him that particular day.  I recall stating that based on our analysis the market had most likely reached the point of being undervalued.  He asked me where I thought it should be.  I replied that it probably ought to be somewhere in the vicinity of 10,000.
 
The thing about determining where the market “should” be is that no one can actually do it.  You never really know.  And yet, there are times when it seems almost certain that wherever the market is at that moment is a level where it should NOT be.  Paradoxical?  Quite.  Yet I have lived long enough to be comfortable with the proposition that just because something is paradoxical, it doesn’t render it wrong or invalid.
 
The market would go on to descend further from that day and that conversation.  It eventually bottomed out around 6,500.
 
About a year later, though, it was in fact back up to 10,000.  When I saw the guy that day he stopped me and told me that he remembered me saying that the market had shot past where it ought to be.  He said that I had “called it” and that I had been proven right.  The decline had been steep and fast, but it snapped back pretty sharply too in the months that followed.  He concluded that it really should have been at 10,000 all along since that’s where it had come back to on that day.
 
Well, in a lot of respects, I didn’t agree with his conclusions.  At least not the details.  I didn’t really think that I had been right in the exact sense as to the level itself, just because the market had now traded back to where it had been.
 
But broadly speaking, the point that I had been attempting to convey in that earlier conversation was that sometimes in the midst of scary circumstances, market declines go right past fair value without looking back.  In that, I think I was right.  Although for anyone who studies the history of how markets behave in times of crisis, what I told him certainly would not have been news.
 
The supply and demand aspect of market prices is really not something your typical investor thinks about day in and day out.  Yet those forces are always at work, and always hold sway.  In any market, when demand dries up, prices fall.
 
Not a whole lot of demand for investments going on right now. 
 
But that doesn’t necessarily mean that the prices of the moment are “right.”  They weren’t back in 2008.  They may not be today.  It may take the market a few  months to sort that out.  But assuming that the market is actually worth what it’s trading for right now, is liable to be a premature conclusion.
 
Do with that tidbit what you will.  I can’t really offer you anything in the way of certainty today.  But I hope that folks won’t spend too much time trying to extrapolate what current levels may mean for the years to come.  It’s questionable how much prognostication should ever be done with market price trends, though it is a much-practiced activity.  But if history is any indicator, the data coming in right now, in the midst of everyone being concerned and acting accordingly, has very little value as a basis for projection.  So maybe save yourself the time…and the angst.