This is the sixth article in a series that will discuss and explain basic investment concepts in hopefully an understandable and meaningful way. Whether you work with an investment advisor or choose to do your own investing, there are some there are things you need to know to be successful. Here is my take on what those things are.
Emotions will cost you some money, and maybe lots! The investment firm Black Rock, whom I believe is the world’s largest money manager, has a chart called “Investing and Emotions – The Ups and Downs of the Market.” It is one of the moist poignant pieces I have ever seen. It shows stock market performance from December 2005 through December 2015. That period had three up markets and two down markets. Super-imposed on the chart is Black Rock’s version of investor emotions. As markets rise we see investors as cautious, then encouraged, then positive, then confident, thrilled and finally euphoric. What a ride up! On the way down we have surprised, nervous, worried and finally defeated. Folks, this chart pretty much says it all. To be a successful investor, you cannot be emotional. But who can help not being emotional while your nest egg shrinks in value and the world appears to come to an end? Successful investors, that’s who!
The Difference Between Short-Term Speculation in the Market and Long-Term Investing in Great Companies. The stock market is a store where people and institutions buy and sell stocks on a daily basis. Here is how it works. XYZ Company announces that it has found a cure for heart disease (good news). People (I won’t call them investors) run to the store and start buying the stock like crazy. In this case there are more folks willing to buy the stock than are willing to sell the stock, and its price rises due to a supply/demand imbalance. The buyers are thinking the price will go even higher. Or perhaps ABC Company reports very disappointing, unexpected quarterly earnings (bad news). People owning the stock will run to the store and sell like crazy. Well, when there are more sellers than buyers (also a supply/demand imbalance) prices fall. Those sellers were thinking bad things about the future of XYZ Company.
The problem with both of these examples is that people are thinking good or bad things will affect the future performance of those stocks. That cure for heart disease could turn out to be a bust. Those quarterly earnings could be a little blip on the road to a profitable future. Whatever happened the price of a stock today has absolutely nothing to do with its long-term future. The long-term value of a company is determined by only one thing … its ability to make money. And thankfully what goes on in the market today has nothing to do with that. Companies control their future: Make a good product. Provide a terrific service. Take good care of your customers. Make more money. Grow your profits and grow the value of your company.
So, do you want to be a short-term speculator in the stock market (even though you don’t think you are) or do you want to be a long-term investor in a bunch of great companies (as in perhaps the 500 biggest companies in America known as in the S&P 500). If you sat back and let those 500 companies do their thing over the next ten or fifteen years, there is a pretty good chance that most of them will be more profitable and thus more valuable. No guarantees, but that’s how it has been for a very long time. Short-term speculator or long-term investor …. Which are you?
All articles in this series will be posted on my website www.McNamaraFinancial.com. If you have any question or comments I can be reached at mike@McNamaraFinancial.com. I promise I will respond.
Michael J. McNamara