The market share prices are largely irrelevant and it has absolutely not the importance many people attach to it.
Today, I want to give you an insight into an aspect that I call the “Secret of Ignoring”, one part of my “Secrets of Intelligent Investing”. I want to talk about ignoring the daily share prices. Ignorance is actually a negatively occupied term. But regarding investing, ignorance could become very useful. Since I started to ignore some things, my investment decisions got much better.
Ignoring is not always a bad thing and it could become a great advantage. Ignoring means not to listen to every information that you can read or hear about the market every day. So, it is about ignoring information, it is about ignoring unnecessary or harmful knowledge and behavior. The knowledge that influences our investment decisions in an unfavorable direction. Therefore, ignoring is fundamental; especially ignoring the mass and its opinion.
The market plays with your emotions
Every day the stock market is in motion. Some stocks moving up, others decline. Sometimes more stocks go up than down, sometimes vice versa. That’s quite normal. Every day some speculators are searching for stocks which they believe will rise in the next days or weeks in the hope to sell them to other speculators who are willing to pay that higher price.
Many small private investors, especially those who just started investing, often make the following experience: They buy a stock and the price increases. Then they are happy and consider themselves the best trader, believing that they knew exactly that this stock would rise. When the price of the stock goes down again and even beyond the price for which they bought it, they quickly panic, because they see their hard-earned money dwindling. Then all too often, they sell quickly and without thinking it through, being anxious that the price will fall further and they will lose more money.
But when the price starts to rise again, these investors only see the backlights of the train they left before. In the beginning, they don’t mind missing the increase of the stock price, but sometimes later, they begin to fear to miss the returns and so they return into the market when the price is too high to buy, only to suffer losses again. Many of them mistakenly believe that if the market is high, it is easy to make money.
Break out of this cycle of misconception
In my opinion, there is only one way not to get caught by your psychology: Ignore the daily share prices. Don’t look at the prices every day and don’t watch every movement of your shares. These movements are largely irrelevant. They’re only an expression of the mood of some market participants, of their belief, if a share price will go up or down in the near future. So, the only thing share prices reflect is the THINKING of people.
Don’t make investment decisions based on that thinking. Make them based on what’s behind a share. Never forget that behind any share stands a company that has value. A company that produces goods and deliver services to people. A company that owns machines, buildings, etc., makes a profit and hopefully adds value. With a share, you want to participate in a company and its success.
The price of the shares which you can see going up and down every day seldom corresponds to the intrinsic value of the company. Sometimes the price is higher, sometimes it’s lower. And from time to time, the price equals the intrinsic value. This swinging of the prices makes it possible for us to take profit. So, a good investment is never independent of the price you pay.
If you focus on the company instead of on the price, you will see that nothing happens to the company even if the share price falls the next day. The company is still the same. The figures don’t change as fast as the price on the market. Or do you really think the company has gotten worse, just because of the decrease in its stock price? The value of the company is still the same. That’s why Warren Buffet says that in falling markets, investors are losing nothing.
If we look at the intrinsic value and not at the market value, then the company is still as much worth as on the day before. The good thing is, that if the price decreased, you can get the company at a lower price. Forget statements, that claim the price of the share always reflects the value of the company: This is not true. The only thing that the price reflects is the mood of the speculators. At best, the price is close to the value.
Psychology is your friend
The price contains a lot of psychology, like anticipated trust, predictions or even fears. It’s just an assumption of the future. Not more. You can’t predict the future and also the psyche of the market participants. Nor how political events will affect the psyche of buyers and sellers. This psyche is our greatest opponent if we want to predict the development of the share price. But it can also be our greatest friend when we use it properly. Then it will give us great opportunities to buy.
Focus on long-term results
Don’t focus on short-term price movements. Rather think about the long-term business results. These results are important, not the price of the share. The daily price is often determined only by a very few. Typically, less than 1% of the owners trade with the stock daily. These few determine the current price. So, if a small minority determines the price, how can that price reflect the value of the company? This assumption makes no sense as well as to watch the daily stock price.
Look at the share price only when you are willing to buy. And always relate the price to the intrinsic value of the company. That’s the only time the price becomes relevant. If you don’t want to buy anything, the price is not worth reporting. Just simply ignore it.
Don’t worry if the price goes down after buying. If your research was proper, your calculation of the intrinsic value right and you have bought with a reasonable margin of safety, you only have to be patient and a trust your work. In the long run, the value of a company is always reflected in the price, which means that price and value will adjust. The future price of the share is not determined by today’s hysteria, but by the future performance of the company.
Ignore the daily market prices
Let’s take Walmart as a little example. If you had bought 100 shares at $16.50 in 1970, 20 years later, you would have owned 51,200 shares at a price of $62. With $1650 you would have made an incredible 3.1 million because the company had such an outstanding performance. Warren Buffett, the most successful investor of our time, admits that he missed Wal-Mart and that this was a very big mistake of him.
So, ignore the daily share price and its daily ups and downs. The prices on the stock market are changing every day because every day someone wants to buy and another one wants to sell. If more people are buying than selling, the price increases; if more want to sell, the price goes down. That’s how it works. The actual value of the company, which is NOT represented by the share value, is not affected by that.
Focus on the company
Pay attention to what is happening in the company and to the value of the company. Use the stock market to find out if the price for the company you are interested in is cheap enough. Use falling prices to get more from that good company at an even better price. You cannot predict the market price, but you can benefit from it.
Do not worry if you buy a stock today and tomorrow you would get the same stock more cheaply because the price has fallen. You couldn’t foresee it. Make use of it and buy again, if you have some money left. If not, ignore the price and look forward to owning a great company.