Does the stock market really matter?

Key Takeaways

  • Stock market doesn’t matter if you invest in undervalued, not appreciated businesses at a good price.
  • Top investors of our time made their money by not predicting the future movement of the markets but identifying great investments regardless of what the markets were doing at the time.
  • Market sends us signals about its overall valuation and sentiment. We can ignore these signals or take advantage of them.
  • Robo-advisors, ETF portfolios and other passive investments typically invest in assets that are driven by the “market”. These investments cannot ignore what the market is doing.
  • Does the stock market really matter? No, it doesn’t. One of the most important lessons I can take away from my many years of fumbling around with investing is that the stock market doesn’t matter at the end of the day. Unless you use a Robo advisor or any other advisor service for your investments, those services invest in “markets,” and for them, the stock market matters very much.

    Stock market is irrelevant

    The greatest investor of our time, Mr. Warren Buffett, once said:

    As far as I’m concerned, the stock market doesn’t exist. It is there only as a reference to see if anybody is offering to do anything foolish.

    In 1960 you could have bought Berkshire stock for $7. Today it is over $422,702.

    Berkshire Hathaway Price history

    Percent return over the entire history of the company is too absurd even to calculate. Buffett achieved this by* explicitly not* investing in the stock market. He ignored Mr.Market and focused on individual businesses instead. It didn’t matter what DOW or S&P were doing throughout the years. It mattered what Coca-Cola was doing, or Geico insurance, or American Express, or any one of his other holdings.

    Buffett couldn’t predict the market. Unlike Michael Burry, who predicted the housing market crash or George Soros, with his bet against the British Pound, Buffett never made any predictions about the future at all. He never predicted the prices of commodities or currencies. He never stated where the economy is headed this year or the next. But if you asked about the economics of the businesses he owns, he can explain them in the greatest depths.

    So how did he do it without predicting what will be valuable in the future?


    He found what is under-appreciated today and gives the business time to shine and grow and for the market to catch up with his thinking. That is it. It is simple but not easy, of course.

    When you change your thinking from investing in S&P 500 to investing in good businesses instead, S&P or DOW or NASDAQ or any other index & benchmark do not matter anymore.

    With that said, Buffett is not oblivious to what is going on in the markets or the world. He often appears on various business programs and has incredible insight into the U.S and world economies. He understands how the market is behaving and the overall sentiment. He has his own outlooks, positive or negative, on the future of the economy. He just doesn’t let those opinions dictate his investment decisions.

    We, too, can have our predictions about the future, but because with a high degree of certainty they will be incorrect, we should ignore them from the start. Even if they are correct, how does it actually help us?

    Knowing the future is kind of meaningless

    Imagine you can time travel to the future and get a piece of information about a certain market. Not an individual company but a certain trajectory in an industry. You can then come back to your current time and make investment decisions based on that information.

    So imagine a person from the early 2000s goes into the future and learns that people view videos on their phones in the future. Majority of internet content is consumed on hand-held devices. That’s awesome, you think to yourself, go back to your time and invest all the money you have into Nokia. At the time, It is the most prominent phone producer globally, and the outlook is complete world dominance. Then for the reasons you and I know, this happens:

    Nokia Stock Price Drop since 2000s

    Or let’s say you learn the oil prices will go up in the future. Great, what do you do? Well, if oil is going up, do you think I should buy a few oil companies to take advantage of that. Great, which ones? Do you go with the biggest? What if it is too big and can’t grow at a fast rate anymore. Do you go for a junior player with a lot of potential? What if the company doesn’t deliver on its promises and goes bankrupt? The list of oil companies that failed during the immense oil price appreciations is too large to list.

    Knowing the future doesn’t help unless you can identify a great business at the right price that will capitalize on that future.

    Imagine it is 2008, and the whole world is panicking. People lose pensions; real estate is crashing, banks are hurting, S&P, Dow, NASDAQ, and every other index is reporting record losses. Warren Buffett, Seth Klarman, Bill Ackman, Joel Greenblatt, and many others are smiling. Why? They are also experiencing losses on paper as they have never seen before, but there is one thing that shines through all that doom and gloom:

    The opportunity to find great businesses selling at a discount goes up tenfold during recessionary periods

    Market sends signals; we can choose to ignore them or capitalize on them

    What the stock market does is irrelevant for choosing individual stocks. But the stock market can send us signals, and we can ignore those signals or capitalize on them.

    Here is what I mean. Below is a look at the S&P500 P/E ratio over the last ten years.

    S&P500 P/E Ratio

    For the purpose of deciding whether Tesla is a good investment at today’s price, as an example, the S&P500 PE ratio is absolutely useless. However, that information is a signal. S&P500 PE at 27 is the highest it has been in almost 20 years. It tells us that the market, in general, is hot and is perhaps overbought.

    So when I am struggling to find a good investment with a large enough margin of safety during this time, I understand why. It also indicates that I have to be much more vigilant when searching for securities to purchase because if I invest today, I am buying at a time when the whole market is going crazy.

    Robo-advisors can’t ignore the market

    However, when it comes to ready portfolios and Robo-advisors, they don’t have the luxury of ignoring the markets. Essentially these portfolios and services invest in straight-forward ETFs that follow their respective indexes and strategies. Many will have ETFs like VTI – Vanguards Total Stock Market ETF, which is exactly what it sounds, a total stock market exchange-traded fund.

    These portfolios and services can never escape the market forces.

    What does it mean to you as an investor?

    That means if you are creating a fresh new account over at Betterment, Wealthfront, Acorns, or any of the other automated investment services, you will be essentially buying into the market at times when it is selling at record high prices.

    These passive investment vehicles funnel new money into the market at higher and higher prices without considering valuations. That is the reason our obsession with passive investing will lead to its eventual demise, and passive investors who blindly put money without considering market valuations will be hurt the most.

    Robo-advisors are gaining higher, and higher AUM is not necessarily good for the market as a whole. It shouldn’t matter much over the long term, but people investing today can expect lower returns over the next decade than the last.

    Unfortunately, that is very likely the case when investors stop looking at valuations, ignore prices and buy at the top.

    How should I invest in today’s markets?

  • If you invest in individual companies, step-up your due diligence.
  • If you invest in an ETF portfolio, mutual funds, or Robo-advisors, expect the next ten years to be worse than the last ten.
  • Never time the market.
  • Take profits when the company you hold has reached its potential, and you can find a better use for that money.
  • Control your emotions as much as you can. Remember that losses are only on paper, and you make them real by selling. Ask yourself, why am I selling? Is it because the company’s fundamentals have deteriorated, or am I panicking?
  • Happy Investing!


    Andy is the author behind most posts, a web site analyzing and simplifying alternative and traditional investment vehicles.

    Recent Posts