Archimedes and the stock market

Archimedes is the ancient Greek who lived in Sicily around 300BC and who is credited with saying that if he had a level long enough and a fulcrum to put it against, he could move anything.

To me the key takeaway for today’s complex and confusing stock market comes from this statement. It’s not the lever part, though. It’s the fulcrum. It’s finding someplace solid to plant your feet and to build a portfolio around.

Thinking in the most general terms, the two important factors in evaluating a stock are concept and valuation. In it’s simplest (and most dangerous) form concept is the dream, the elevator speech you use to explain what a company does and why it’s interesting. You might say” Streaming is becoming the dominant form of entertainment content delivery to homes and ROKU is the leading independent in the field.” Valuation, in contrast, is the current stock price compared with here-and-now measures like book (balance sheet net asset) value, or net working capital (meaning after subtracting long-term liabilities) or net cash.

In bull markets, it’s all about concept. In bear markets, it’s all about valuation. In a typical business cycle-driven market (not the current situation, as I see it), the turn from bear to bull usually comes from a combination of valuation plus the first hints from companies that business is beginning to turn up.

In the middle of June it seemed to me that tech stocks were reaching the kind of valuation lows that typically mark market bottoms. Each market has it’s own special characteristics, though. In the present case it’s that the dual share structure that gives founders voting control over “their” firm is a deterrent to the takeover bids that such low valuations would otherwise trigger.

It’s still my guess that the S&P bottomed back in June (I’m having trouble getting my finfers to type out this sentence, which illustrates my level of conviction),

I’m not going to bet the farm that this is the case, though. I am going through my portfolio, name by name, though, to decide what to do with each. I’m noting my cost basis; I have one or two that are far below my purchase price, but that’s life in the big leagues. For me this is a strong signal to sell–to harvest the tax loss, or at least move into something I understand a little better.

Assuming I’m correct that the bulk (if not all) of the market downturn is behind us, there are still an unusually large number of one-time economic factors influencing the environment–and that I think will have an important influence of the shape the market takes in the coming year.

In no particular order, and probably not a complete list, they are:

–rhythms of post-pandemic life. An example: Marriott is down about 3%, ytd: Carnival Cruise has been cut in half

–the US anti-immigration stance. As regular readers will doubtless be tired of hearing, this cuts the growth rate of the US almost in half and sets the country down the same path Japan embarked on in 1990, yielding in the Land of Wa 33 years–and counting–of economic stagnation

–the end of the fossil fuel era

–the Russian invasion of Ukraine under Putin

–the end of entrepreneurship (called “socialism with Chinese characteristics,” under Deng) in China under Xi

–the legitimation of white racism in the US under Trump, and his attempt to overthrow the government

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