Believe it or not, there is a dark side to stock market tickers. It can drive some stock market investors crazy. Well, the majority of stock market investors at least.
We often notice that as the colour of ticker changes from green to red, the expressions on faces of few investors also undergo a transition – from euphoria to panic. Here, I mean those stock market investors, who look at stock prices rather than companies which are actually behind it, which should be the actual reason for investing in a business.
The real reason for a stock market investor to invest in any stock
As quoted by legendary stock market investor Peter Lynch “Behind every stock is a company. Find out what it’s doing”. What this means is that the real reason to invest in a business should be its fundamentals because only if the company does well, the stock price will also do well.
To understand this concept better, let’s take a real-life example. With the due date April 1, 2020, for shifting from BSIV standard to BSVI coming closer, auto companies have announced significant discount offers in addition to existing offers.
Both two-wheeler and four-wheeler manufacturers are offering huge discounts on all their BSIV models. According to the website of a popular auto magazine, a prospective car buyer could now pick up a BSIV Baleno car for a discount of almost Rs. 65,000. Does this mean that something has changed in the quality of the car? No.
It is still an excellent car with comfort, safety and style and will drive the same way if you had purchased a Baleno for a higher price, a few months ago. Only the amount of money you need to pay for it has changed. So, you are essentially getting the same value but at a lower price.
Now, this is exactly what happens with stock prices too. But remember the quality does not change every second, despite the change in stock prices. That\’s why, before purchasing any stock, one should remember Warren Buffet\’s famous quote in his letter to shareholders of Berkshire Hathway at the peak of 2008 financial crisis, – \”Price is what you pay, & value is what you get!\”
Look at fundamentals instead of stock prices
Rather than judging a share by its price, it is imperative to evaluate a stock by the quality of the company’s fundamentals. There are a host of economic and global factors making the headlines every day, which also influences the stock price.
On the contrary, there is a release of the company’s performance reports on a quarterly, half-yearly or annual basis. In the interim period, share prices can be very volatile, and companies may become under-valued or over-valued.
The guru of value investing, Benjamin Graham, simplified this concept by saying that in the short term, the market is like a voting machine – tallying up which firms are popular and unpopular. But in the long term, the market is like a weighing machine – assessing the substance of a company.
While investing, you become a part-owner of the business. Hence, the fluctuations in the stock price in the short term should not bother you.
Yes it can be difficult at times to digest a sharp correction in share prices in the short term. But in the long run, quality stocks with strong fundamentals will triumph over the negatives and emerge victoriously.
It is crucial to ignore red and green on stock market tickers to become a successful stock market investor. Yes, the colours red and green are essential, but only at traffic signals when driving. Definitely, not on stock tickers in the stock market, where the quality of the fundamentals is the king.
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Read more: How Long-term investing helps create life-changing wealth – TOI.