Everyone knows: buy low and sell high. This applies to individual stocks, sectors of the economy, or to the stock market as a whole. We use sentiment and expectations data to help point us to areas where prices may be low relative to intrinsic value*. Valuation also helps us have realistic expectations for the range of likely outcomes over the long run, say 10 to 15 years. When prices are high, no matter how desperately we want to project high returns over the long term, we know that those expectations likely aren’t realistic. Conversely, when the market can be bought at a low price, we feel fairly confident in attractive long-term returns even if we experience poor performance in the short term.

_{*Intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as market value.}

When optimism rules, people tend to feel overconfident when investing. Conversely, general pessimism often leads people to be irrationally nervous about investing. Within our firm, we typically use the term ‘Consumer Sentiment’ to refer to these longer-term measures of general optimism or pessimism about the economy. When sentiment is extremely optimistic, we treat this as a warning to be particularly careful even though many around us will think we are fools. When sentiment is extremely pessimistic, we must force ourselves to embrace the data and invest what we can. This is our greatest opportunity for wealth creation.

Investment costs are boring, but it is important to be aware of their impact. As an example, investors routinely pay more than 2% of assets for money management each year. This includes the fully disclosed but often hard-to-notice fees paid to mutual fund managers. What does this mean to you after 15 years with your starting investment of $1 million? Even if there is no growth in your investment, that still costs you $300,000 over the 15 year period! Costs matter.

View the Forbes “The Heavy Toll of Investment Fees” article.

Quantifying investment decisions helps to inoculate us against the simple stories that often drive poor investment decisions. The financial industry and the financial media thrive on simple story-telling because they know from experience that stories are easy to understand, and investors confuse understanding a story with understanding an investment. Exciting companies can be bad investments because expectations are too high. Boring stories may represent fantastic investments because no one is interested in the opportunity. To know the truth requires detailed analysis which is often time-consuming and quite tedious, but it is necessary to help avoid the narrative and focus attention on what really matters.