The stock market has certainly been thought provoking thus far throughout February, to say the least. We started the month with one of the quickest double-digit sell-offs of all time, only to watch it rebound back towards all-time highs at a similarly quick pace. In my previous piece, I discussed some of the likely reasons for the recent downdraft, from a fear of inflation and the coinciding rising interest rates to the structural issues the market faced revolving around the volatility index and niche market products. In that piece I also mentioned how surprised I’ve been at how quickly my own sentiment regarding the market have changed. I’ve spent time during the last week or so analyzing my own reaction to the volatility in an attempt to stop myself from making mistakes in the future.

My personal fear/greed gauge has swung back and forthright alongside the volatile market moves. These initial reactions aren’t ideal; however, upon reflection, I’ve also realized that the direction of one of these swings is likely far more dangerous than the other. Fear can be a healthy thing but I’m having a hard time imaging greed in a positive, productive light.

Thankfully I’ve been at this game long enough to know that first reactions to market moves ought to be taken with a grain of salt until they’re validated with the data that only comes with proper due diligence and rational introspection. No matter how fast the market seems to be moving on a daily basis, haste is probably not in the retail investor’s best interest when it comes to decision making. First of all, you nor I will ever be able to keep up with the algorithms that drive market momentum in the short-term. Furthermore, this momentum is oftentimes fueled by technical analysis or simply keywords in press releases triggering pre-determined responses; in hindsight, we’ve seen that some of the mini-corrections or crashes that computers have caused in the markets aren’t based on fundamentals at all, which is a problem for traditional, conservative investors.

The problem is, there’s a lot of action and noise created in the market by forces that we’re taught to ignore. It’s always been difficult to determine whether or not company specific sell-offs are caused by isolated issues or systemic problems. The former oftentimes result in buying opportunities and the latter should typically be avoided. To me, it has always been more of an art than a science when it came to attempting to determine whether or not issues were going to be long-lasting. This art/science conundrum is basically the case for all types of risk management. Speculation will always be involved when looking at disruptive forces in the market. It’s impossible to accurately measure the strength of any company’s moat over the long-term, but this is a big part of my analysis as I apply an appropriate margin of safety target on an investment.

In other words, I’m happy to pay a higher valuation premium for a company with high barriers to entry and a strong, defensive market position. Just to give a quick example, we’ll go no further than the largest individual holdings in my portfolio. Looking at a couple of my favorite companies to own, Apple (AAPL) and past Sure Dividend Newsletter recommendation Boeing (BA), I’ll discuss how valuation plays a role in my decision making and how this is coupled with a healthy fear in the market.