Give more importance to the value of a business rather than other facets like market price, interest rates, inflation or economy.

03 Jun 2016

The speculator’s are concerned about what the stock’s price will do where as investors are concerned about what the business will do


While investing in equities, every retail investor gives priority to the market price of stocks. Their investment decisions mostly carried away by the market price of stocks by creating a perception that stocks that have high market price are overpriced hence do not invest in them or stock that have low market prices are perfect to pick. This conventional thinking makes them to bypass checking the real value of businesses and miss the chance to earn wealth.

One should always keep in mind that the market price of a stock will not always represent its real value of businesses. While investing in equities, investors should see the businesses and its prospects rather than its price. Most of the investors spend too much time and effort in watching, then finally predicting or anticipating the price changes. They give only far too little time on understanding the underlying business of the stocks. And it is the perfect example that distinguishes them from the successful investors who have made enormous returns by investing in the stocks of quality businesses.

Hence, the investor should look at the company in the same way as a business person does. The businessperson wants to buy the entire company and the investor wants to buy portions of the company. Since both of them wants to earn profit, both should be looking at the same variables

In the long run, the market price of a stock should approximate the change in value of the business. However, in the short run, prices can move extensively above or below a company’s value for any number of illogical reasons. The problem remains that most investors use these short-term price changes to measure the success or failure of their investment approach, even though the changes often have little to do with the changing economic value of the business.

Just as people spend several hours worrying about the stock market; they also tend to worry needlessly by contemplating about interest rates, inflation and economy. If you select stocks that will benefit by a particular economic environment, then you have to continuously adjust your portfolio to benefit in the next economic scenario. Macroeconomic forces may affect returns on the margin, but overall, quality businesses are able to profit nicely despite vagaries in the economy. Spend time more wisely on locating and owning a business that can profit in all economic environments than by renting a group of stocks that do well only if a guess about the economy happens to be correct.

So while selecting stocks, look at the value of a business and its prospects for the long run.What happens to the stock price in the short run is inconsequential.

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