The Writer’s Coin

I normally don’t recommend any articles from The Motley Fool (they are mostly glorified infomercials for their products. Entertaining, sure, but still just looking to sell you on things), but this one actually brings up a good point.

It’s probably the number one reason why people lose money in the stock market: the stock price has very little to do with the overall health of the company. You hear it over and over in investing literature (especially Buffett and Lynch) : don’t forget that these are businesses, not just numbers on a screen. If you see a stock price and just want it to go up and up no matter what so you can get rich, you are speculating (fancy term for gambling).

Nothing wrong with it, but you aren’t investing.

This whole idea is also the underlying raison d’etre for value investing. It’s because of these “moody” up and down swings that you can get good deals on businesses when everyone else is selling.

People (investors) need to start becoming a little more sophisticated. Just because a piece of news comes out, it doesn’t mean you should panic and sell your stock. Price going up does not equal great news and price going down does not equal bad news. Yes, it sounds weird, but that’s why you hear so many economists saying that the coming recession is a good thing. You can’t sprint your way through a marathon—you’ll die.

Part of this is the media’s fault. How often do you hear or read a press release come out that sounds like this: “X announced today that Y happened, sending the stock price soaring/falling. Ted, our finance guy, has more. Ted, what’s going on here?”

Which is the more interesting question. What’s going on? People are tying news to a stock price instead of tying the underlying numbers to the stock price. Granted, those numbers aren’t boring and that’s why The Motley Fool has so many readers.

It’s more fun to speculate.

Tags: Investing, Stocks