The stock market, like life, doesn’t always make sense.
As I mentioned in the previous blog, the market doesn’t always rise and fall based on whether our political team is winning or losing. Similarly, the stock market doesn’t always match up with what we see around us. We can have friends lose their jobs and their businesses, the government give money to Americans due to financial hardship related to the pandemic, unemployment skyrocket etc., and the DOW can be marching upward seemingly oblivious.
Or take Tesla for instance. Back in December its market cap was bigger than nine of the largest global car companies even though it sold only “a small fraction of the volume of cars that they do.”1 One article in the summer of 2020 said that “Toyota sold around 30 times more cars last year and its revenues were more than 10 times higher [than Tesla]."2 Even though that’s true—and regardless of whether on should buy or sell either stock—the story of the two stocks couldn’t be more opposite.
One could have put $10,000 into TSLA a year ago today and as of this writing it would be worth approximately $77,000.
If one had done the same with Toyota, one would likely be just a smidge above what was originally invested and spent a good portion of last year underwater.
Of course, cars aren’t all that TSLA is selling, and the grandiose visions of its CEO Elon Musk are well known, but there is a lesson here: the price of individual stocks and stock market indexes don’t always make sense. What happens in presently reality doesn’t necessarily match what’s on paper.
Therefore, if you are going to be a long-term investor in equities you need to recognize that price doesn’t always match fundamentals. This doesn’t mean you have to like it, and it definitely doesn’t mean you shouldn’t look at fundamentals when making investment decisions. It just shows us that investing can be counterintuitive, so plan accordingly.