When a top American business leader starts rattling off reasons to fear today’s market, investors get uneasy. “There continues to be a heightened degree of uncertainty stemming from complex geopolitical conditions, tariffs and trade uncertainty, elevated asset prices and the risk of sticky inflation,” said JPMorgan Chase CEO Jamie Dimon in a recent interview.
But in the echo chamber of media-made doubt, Dimon’s actual message got lost. To prepare for the worst, he recommended beefing up reserves, fortifying capital, and stress-testing for varied shocks. He didn’t advise hiding under the nearest desk but rather putting in the work, preparing and carrying on.
That’s an important distinction. Too often, the difference between trading volatile stocks or owning great businesses comes in how investors interpret the latest headlines.
It would be perfectly human to interpret “heightened uncertainty” as large systemic problems with no clear solutions. In this situation, it may seem sensible to keep assets in cash until clarity is found … right?
Perhaps that’s logical. But wise? Maybe not. Remember, the day-to-day machinations of the stock market (or even of the broader economy) matter less to investors than having partial ownership in worthwhile businesses run by real people with real profits, margins and cash flow.
Perhaps this sounds trite, but it’s critical to internalize. Well-run companies — whether big (like Dimon’s) or small — don’t wish for smoother seas; they build better ships. Whenever prudent, management teams raise prices, trim costs, improve supply chains, retire debt and buy back shares, all while continuing to build their core offerings.
During a market downturn, these characteristics may appear insufficient. Too often, short-term panic causes even great companies to dip in value. As Ben Graham used to say, the market is a voting machine in the short-term and a weighing machine long-term. But eventually, well-conducted business is rewarded.
These days, our investment office has been referring to the markets as “instability on roller skates.” When someone first tries to skate, they may experience a little wobble or stumble, or even an occasional fall, but they keep moving forward. Some shakiness is worth recognizing and discussing. Consider the next three points.
First, 40 years ago, the 10 largest companies in the S&P 500 represented roughly 10% of the total index. Twenty years ago, that proportion had grown to a fifth. Today, it’s about two-fifths. Pause and consider that for a moment. The 10 largest companies now account for roughly 40% of the S&P. While neither good nor bad, it indicates the market is increasingly concentrated among a few behemoths.
Second, while the index climbed over the past decade, so, too, did talk of geopolitical, fiscal and policy risks. Yet among all the talk, nothing rose faster than enthusiasm for speculation. When markets rally, equities end up in the “wrong” hands: traders, tourists and teenagers with phone apps. The democratization of investing, which is also neutral, means more people can freely and instantly swap equities while in bed or stuck in traffic.
And third, alongside low barriers to trading, we’ve seen an increase in information quantity and access. Search YouTube for investment-related terms, and you’ll quickly be inundated by talking heads sharing commentary on everything from individual companies to coffee futures. As a registered adviser, I have frustratingly strict limits on what commentary I can provide. But any ol’ college kid can start a YouTube channel and offer convincing, if not completely false, investment “advice.” More information isn’t inherently good or bad, but the challenge comes in discerning what’s worthwhile amid the increased noise.
This isn’t a call to arms, but rather an invitation for readiness. Prepare mentally for bumps. Rehearse in peace what you’ll do in war. Remember that financial entertainment often disguises itself as breaking news. And above all, realize that volatile stocks and great businesses more often demonstrate correlation, not causation.
When the volume of information exceeds my ability to ignore it, I return to a simple checklist. These questions help me stay centered and properly evaluate companies:
• Does this company sell an essential product or service with repeat demand?
• Are their margins and returns on capital consistently higher than their peers?
• Can their balance sheet sustain self-funded growth and survive shocks?
• Does management show a track record of rational capital allocation?
• Is their dividend (if it exists) well-covered and growing healthily?
• Does their price sensibly correlate to the business’s quality and prospects?
If we can’t answer most of those affirmatively, we move on. No prize is given for owning everything. But owning selectively, patiently and rationally will bring rewards.
Our world is inherently complex, risk-prone, and at times, downright scary. That hasn’t changed, nor will it any time soon. The key is to zoom out and remember the long-term trends. Metaphorically speaking, focus on the climate, not the weather.
In every cycle, equities move from strong to weak hands and back again. Prices overshoot in both directions. But over time, great businesses keep serving customers, earning profits, paying and raising dividends, and rewarding the patient investor.
The market can always trigger either panic or a party. Neither equates to a plan. Owners don’t need clairvoyance; they need clarity. Volatile stocks come and go, but great businesses endure. Choose to be an owner.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Blind Spots: The Mental Mistakes Investors Make” and “Intelligent Investing: Your Guide to a Growing Retirement Income” He was named by Forbes as a 2024 Best-in-State Wealth Advisor, and a Barron’s 2024 Top Advisor by State.