Sentiment is what drives the markets most of the time because most market participants don’t have the first clue about fundamental valuations. If they did the market indices would be nowhere near their current levels, says Kelley Wright, editor of Investment Quality Trends.

Of course, none of these fundamental valuations matters until they do, but when they do they typically do in a hurry.

Probably as good an illustration as any at how sentiment drives market participants buying and selling decisions is what happened last week when the FDA announced they were considering a change in the allowable nicotine levels in tobacco products.

Altria Group (MO) and Philip Morris International (PM) promptly sold off. Now, the FDA didn’t say they were implementing a change in policy, they said they were merely considering a change in policy.

Do you know how long it takes a government agency to consider something? It could be years. In the meantime, nothing has changed fundamentally with MO or PM’s earnings or earnings capability. Nonetheless, the stocks were sold off.

Playing devil’s advocate, assume that the FDA does implement a change and the allowable nicotine levels are reduced.

How exactly does this cut into the earnings of MO or PM?

My guess is if someone has a serious nicotine habit, they’ll simply consume as much product as necessary to get the amount of nicotine they need to fulfill their habit. This is to say I could see MO and PM selling more product rather than less.

If I’ve learned anything about human behavior over my lifetime it is that folks take their addictions seriously, and will pursue all means necessary to scratch their itch.

This same type of analysis, or lack thereof, is being applied to the retail industry. According to the conventional wisdom, Amazon (AMZN) is going to put all retailers out of business.

Home Depot (HD) even got hit. Have you been to a Home Depot lately? Every time I go they’re busy as bees. I doubt seriously folks are going to start buying building materials and sod on Amazon.

I love innovation, it’s great and a driver for the markets. I like innovation that is useful though. By example, I don’t use Facebook (FB), and neither do my kids for that matter.

They used to be into Instagram, but they and all their friends primarily use Snapchat (SNAP). I get it that these are all ways of communicating, and as social animals we humans like and need to communicate. I’m not so sure though how and if these things are contributing to the growth and development of the species.

My kids tell me we have hundreds of channels on our cable system.

I wouldn’t know because I rarely watch because I don’t have the time.

That’s probably just as well because they tell me most of the channels stink. Clearly, this has created an opening for Netflix (NFLX), so folks can pay for and watch only the content they want. I think that’s great, but I have no idea how to value the company though.

Apple (AAPL) and Google (GOOGL) have obviously changed the way we do lots of things. I own and use Apple devices, and Google provides access to all kinds of information. My wife watches videos on You Tube to learn new crochet patterns and watercolor techniques.

As a value investor, however, I have no idea how to value either company. I’m going to go out on a limb and suggest no one else really does for that matter, but they’re innovative technology companies that folks think are the greatest things since sliced bread.

Now Texas Instruments (TXN) and IBM (IBM) are two tech companies I can value. I know their dividend yield patterns and can peer into their balance sheets and cash flow statements.

One subscriber wrote me the other day and said that Watson was a joke. Another said IBM was going the way of Eastman Kodak. Maybe they will, but I know no company has reinvented themselves as many times as IBM has, and they’re still making money.

I don’t think we’re going to have a bear market, not over the next few years anyway. I do think we will have an old-fashioned correction sooner rather than later though, which will provide an excellent buying opportunity. Until then we stick to our knitting, buying only high-quality at good value where it fits into our portfolios.

Kelley Wright is editor of Investment Quality Trends.

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