I’ve always been intrigued by the adage, “the stock market climbs a wall of worry.” This statement is not only true; it accurately and succinctly describes what makes the market work. Moreover, it is particularly relevant in the context of the current market environment.

So, what is a “wall of worry?” Or, why can worrying make the market go up?...

Essentially, an individual stock, as well as the overall market, rises when reality proves better than expectations. Conversely, disappointments tend to drive stocks or the overall market downward. Back in the fall, when we feared that the price at the pump would soar to $5 per gallon, we were relieved, if not grateful to pay only $2.50. Whether investors expect a major disaster which turns out to be only a temporary problem, or a gradual turnaround which becomes a remarkable recovery, a rising market requires positive “surprises.”

The bigger and more widely debated the “worry,” the larger the potential impact should reality prove different. In this sense, the more concerns that can be identified, the greater potential for positive surprises. The reverse also holds true. The higher the expectations, the greater the potential for disappointment.

Following this logic, today’s wall of worry is towering…

A sustainable wall of worry is built upon controversies in which there are compelling arguments on both sides. The endless intellectual debate strengthens the wall of worry like a brick layer who methodically adds another row of bricks to an existing wall. Today, the pile of bricks appears limitless. These endless issues to worry about include: the quagmire in Iraq, nuclear threat in Iran, rising interest rates, fears of inflation, trade imbalances and the threat of protectionism, an out of control federal deficit, and an embattled president facing the lowest approval ratings of his presidency. Many of these issues are interrelated, and while the wall grows ever higher, improvement on any of these fronts would likely be a catalyst for the market to rally.

But what about individual stocks?...

While accurately measuring expectations is critical to successful investment decision-making, some situations are easier to assess than others. For example, understanding investor expectations for Google might be more difficult than figuring out what expectations are for a more predictable company like PepsiCo.

In an annual presentation to Wall Street analysts, Google CEO Eric Schmidt appeared to suggest that Google’s revenue could potentially grow from $6.5 billion in 2006 to $100 billion at some point in the future. Let me try to put this prognostication in perspective. $6.5 billion is already more revenue than is generated by 46% of the companies in the S&P 500. I can’t think of any other company of similar size that is willing to predict a 15-fold expansion in revenues.

At the same time, Google currently has a market cap of $104 Billion, making it the 19th largest company in the S&P 500. Should the market cap appreciate by a similar factor of 15, Google would become the largest company in the S&P 500, far surpassing Exxon Mobil which is the largest company today with approximately $378 billion in market cap.

There is no denying Google’s accomplishments, nor its growth potential, but can Google really live up to these lofty expectations? Even more important, is it a wise investment to bet that they will?

Patriots on a mission…

In my experience, the best investments are often companies run by understated management, who prefer to under promise and over deliver. Sam Walton, the legendary founder of Wal Mart was one of those guys. So is the CEO of PepsiCo, who is far from a household name. Yet under the unassuming leadership of Steven S. Reinemund, PepsiCo has dramatically out performed its main rival, Coca-Cola, since his tenure as CEO began in May of 2001. These quiet leaders concentrate on the task at hand and aren’t overwhelmed by themselves or the magnitude of the moment.

Success usually comes to those who embrace the exhilaration of competition, yet aren’t consumed by it. What a wonderful example of this we have with the George Mason Patriots and their remarkable run to the final four in the NCAA Men’s Basketball Championship. Their motto from the beginning of the tournament has been to have more fun than any other team. For the Patriots, a mission accomplished.