A number of pundits and predictors make a decent living telling investors why the market is too high or too low.
They proffer that the market is overbought or oversold for this obvious reason or that less obvious reason.
The impression is these sages can set the market straight and get it on the right track.
They Are WrongThere’s only one problem: These folks are always wrong.
They may have significant data to support their position, including reams of historical charts and comparisons.
Here’s the problem with these pontifications restated: The market is always right.
No matter what you or anyone else thinks is should be, the market doesn’t really care. The market prices assets every minute of every day the markets are open and it is never wrong.
Here’s why: The price of anything, whether stocks, bonds or bananas is what a willing seller and a willing buyer agree on - no more and no less.
Price and ValueIt is important to not confuse value and price. A stock may be valued much higher or lower than the price it sells for.
However, that doesn’t necessarily change the price.
Value is a subjective term, while price is absolute.
This doesn’t mean investors should abandon their determinations of value, in fact, just the opposite.
It’s a safe bet that value investors are among the most successful over the long term (think Warren Buffett).
Value investors attempt to identify stocks that are being priced below the company’s value. We often say the market is incorrectly pricing these assets, but that is wrong.
Correct WayThe more correct way to describe the activities of value investors is they attempt to find assets trading below the true value of the company.
Their strategy is to buy and hold the asset until market pricing rises to reflect the true value.
This does not mean the market was wrong in pricing the stock lower than what the investor believes is the true value.
It simply means that at that moment and given all the other factors that drive stock prices, this is what a willing seller and willing buyer agreed upon.
As we all know in volatile markets, that price may change second to second.
Investors are not particularly concerned with these fluctuations other than finding a window to jump in and buy.
Influence PriceThere are many factors that influence stock prices. As crazy as it seems at times, the market is always right in finding that price where buyer and seller meet.
Indeed, this is the primary function of any market: bringing buyers and sellers together. What price they agree upon is of no concern to the market.
Don’t confuse price and value. Traders (people who frequently buy and sell assets are only concerned with price.
However, investors with a long-term perspective are more interested in the value of the asset and if they can buy it at a discount.