12/17/2012 01:45 pm ET Updated Feb 16, 2013

Bullishness, Bearishness & Other Delusions

The Buddhists will tell you that optimism and pessimism are both delusions. The only reality is reality itself, in all its naked splendor.

To be "bullish" or "bearish" is really a similar exercise in being foolish. To be bullish on stocks implies some knowledge they will go up in the near future, when this type of information is (by definition) unknowable. It's no more intelligent than being bullish on "red" at the roulette table or being bearish on "black." To say all stocks are undervalued or overvalued, especially in relation to other asset classes might actually tell you something. Not much, but something. To dive deeper and select sectors or stocks that are overpriced or bargains -- now you're starting to get somewhere.

It's amazing how otherwise intelligent people -- those who would never consult a fortune teller, yank the handle of a slot machine, or pencil into a calendar "end-is-nigh" proclamations will actually lap up stock market predictions with straight faces.

There's the old story of the unscrupulous broker (is that redundant?) handing out business cards at the cocktail party. To half the guests he whispers "Buy IBM. It's going through the roof tomorrow." To the other half: "Sell IBM. It's tanking at the open." The next day, he's guaranteed to get adulatory calls from one side of the room. Most TV pundits are no different. They know that a few key predictions will garner attention, however wrong some of them may be. The more outrageous the prediction the better. Like a broken clock, worthless prognostications, uttered often enough, are still right twice a day. If we saw a shaman on TV predict lightning, we would call him a quack, even if it struck that evening. But if a talking head says the market's going down -- and then it does -- we call him a genius. To become better investors, we need to stay away from shamans and hucksters, and instead focus on the only thing that matters.

Value is what matters, and keeping a constant, objective eye on value, without any bullish or bearish prejudice or delusion, is the goal.

There are always stocks trading at discounts and premiums to their intrinsic value. Buying the one and selling the other is the best way to invest -- without regard to macroeconomic red herrings or market timing. It does make for less excitement than the killer trade. But every truly exceptional investor from Warren Buffett to Christopher Davis to Marty Whitman to Charles Brandes to Howard Marks has followed this approach. So don't take it from me. But ignore them at your peril.

For those inclined to learn more about stocks and their relationship to value, a visit to might be worthwhile.

Not every cheap stock is a buy. Some are too risky to take a gander at; others are too difficult to value. Finally, not every cheap stock is a good business. As Buffett always says, the idea is to buy a good business at a decent price, not a mediocre business at a very cheap price.

It follows that not every overpriced stock is a sell. Tax consequences alone sometimes dictate the decision to hold an expensive stock. Some companies are so good they may be worth keeping, even at some modest premium to intrinsic value. But anything grossly overvalued has to go. Don't let the tax consequences tail wag the dog of fundamentals -- and never hold something only a greater fool would now buy.

Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.