The Theater is (Maybe) Burning

Phil Town, a value investor and author of numerous investing books made an analogy that has since stuck with me: Imagine a movie theater packed full of happy, distracted people. One person in the back of the theater smells a fire. Though he is alarmed, he doesn’t scream “Fire!” and he doesn’t make a scene. Instead, he gets up, and slowly makes his way out of the theater. This person was smart enough to know that if he had made a scene, or waited until other people noticed, it would have made it much harder for him to get out.

Of course, fires grow, and eventually more people become aware of the danger. Before long, the happy, distracted crowd becomes a frantic mob. Everyone is trying to push their way out of the theater, but there is only one door. For all anyone know’s there may not be a fire at all. The fire may be next door, or in another part of the building, but, herd mentality prevails. The first mention of danger, everyone rushes out all at once.

This, Phil Town says, is exactly what happens in the stock market. Occasionally a company may hit a snag, someone yells fire, and soon everyone is trying to sell their shares so as to not lose money. Smart investors will either be the quiet ones who exit the theater first, or, they’ll enter the theater after everyone has abandoned it, look around, realize there was no fire in the first place, and enjoy the rest of the movie in peace.

The Modern-Day Herd

Benjamin Graham’s “The Intelligent Investor” is an interesting read, however the book is rather outdated in several ways. For one, I’m not sure Benjamin Graham could have predicted the impact social media, online trading, and meme stocks would have on the market. Today, it is incredibly easy for anyone in the world to trade any public company, any time of the day. As a result, it seems like everyone has an opinion, and everyone is willing to place a bet, even if they have no knowledge of what they’re betting on.

I have to admit, it’s hard to ignore all the juicy chatter. I’m not one for scrolling through the conglomerate mind palaces of Mr. Zuckerberg or Mr. Musk, but I do read the trades. Even in the Wall Street Journal, it’s hard to look away from the seemingly endless string of analyst predictions, sporadically changing sticker prices, and the rise of tech fanatics looking for an algorithmic boost.

More and more, it feels like financial publications, bloggers, influencers, and everyone in between now uses the stock market to make a quick buck rather than compound their income for the long term. Today, the stock market seems impossible to predict, let alone find a good company on sale. There is so much information, that sorting through it, it’s hard to discern the accurate from the opinionated. Nobody cares about a burning theater nowadays, and those who do run, jump right back in at the first hint of stability.

Observing the Herd.

So, am I still supposed to wait for good companies to go on sale? Will the good companies I research ever actually go on sale, or will the internet herds storm in before I have a chance to find a seat? Am I supposed to listen to the analysts and the bloggers and the internet trolls? Or should I trust that my own research is sound?

The answer? I have no idea.

At the time of this writing, there are countless factors influencing the market. Company stock prices are fluctuating at mind-bending rates, everything is overpriced, governmental changes around the world are influencing trade, commerce, inflation, and the result is a big furry blanket of uncertainty over everything. People seem to be buying in just as quickly as they’re selling out. I read reports of all time highs, then all time lows, then cry’s of a crash, followed by confident market growth. Nobody seems to know up from down or left from right.

Rather than respond to these second by second changes, I’m taking the stance of observing from afar. Every morning I make a cup of coffee, I read the Wall Street Journal, and Barron’s, and Yahoo Finance. I spend some time looking into a company I’m interested in, and then I leave the market alone.

One day, the market may crash, or it may stabilize. One day one of the companies which I’ve researched well, and which I’d be willing to invest in may go on sale, at which point I may decide to buy it. I may wake up one morning with bonds touting rates upward of 8%, at which point I may decide to dip into bonds.

All that to say, I refuse to follow the herd. Nobody is able to predict what a company, or the market as a whole will or won’t do. I’m not a gambler, and I’m not gullible. If the market is unpredictable, and all of my wishlist companies are overpriced, then I won’t invest. I’ll continue to read the trades, work my day job, compound my money safely in a high-yield savings account, and… wait.

This may not be the best course of action, but it’s the only one I feel comfortable with.

Who has the time to go to the theater anyway?