Don’t Take the Stock Market Personally
Investor Jim Grant once said, “To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.”
Investing in the stock market is often viewed as a purely analytical practice that should look something like this:
1) The public stock market allows anyone to become an owner of businesses.
2) The primary concern of those businesses is earning a profit.
3) Investors pay a price for the stock that reflects the ability of the company to pass profits back to the owners now and in the future.
This is true over long periods of time but in the short-term anything and everything can impact share prices. As Grant suggested, when people are involved, things can get messy.
In 2007, the market was at all-time highs because investor enthusiasm ignored significant risks in the economy, pushing prices forward. We then experienced the Great Financial Crisis.
Then in 2012, as we approached the prior highs of 2007, the market sold off before rebounding and going on to create one of the largest bull markets the US stock market has ever seen.
In either case, investors who held on and stuck to their investment strategy did just fine.
The key is to not take these short-term movements personally. Your investment strategy is not wrong just because you lost money this week, month, or year. On the flip side, your investment strategy is not right just because you made money recently.
The challenge for long-term investors is that we play in the same arena as investors playing entirely different games. Some of these games are played by short-term investors who are in the market for days, hours, or even seconds, trying to make a small profit. Others are long-term investors who have entirely forgotten what game they were playing in the first place.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.