In our daily lives, people often express their opinions about what we’re doing. To a certain extent, caring what other people think can check our own actions. But people’s opinions about us are based on their own experiences, which may or may not be relevant to us. Giving too much credence to what other people think can prove to be detrimental.
As in life, so in investing—with one difference: people sometimes hide their thoughts or whisper them behind our backs. In the investing world, however, we always have a general idea of what everyone is thinking. Because there’s an average of their opinion, expressed as a number, that is reported moment to moment. It’s called the price.
When the majority of investors are optimistic about a particular company stock, the price soars. And when they are pessimistic, the price plunges. If we own shares of this particular company, and we respond to these price moves, then we may be guilty of caring too much about what other people think.
If you haven’t done your homework and you really don’t know what you own, then the opinions of others can mean a lot.
For example, let’s take Acme Widgets (AW), the fictitious company frequently used in classic economic texts. If you can closely follow what Acme Widgets does, if you know what its prospects and finances are, then you are in a position to keep your own counsel about whether to buy, hold, or sell the stock.
But if you bought it based on something that you read in a magazine or saw on TV or heard from a friend, and have not taken care to understand the business of Acme Widgets, then the opinion of others takes on more meaning to you.
Let’s dig a little deeper. Suppose that AW’s stock is selling for $10 a share and that its earnings are $1 per share per year. If you have a strong belief in the solidity of the company, its business model, and its prospects, you might be happy to buy it at 10 times earnings.
And let’s suppose that some time after you buy its stock, a lot of other people see the value that you saw, and the price of AW soars to $20 per share. At this point you are feeling pretty good about the thoughts of others.
But now let’s suppose that the price plunges back to $10, or even lower, to $8. If nothing has changed about AW except the opinions of others, why do you care?
Let’s make it even clearer. Suppose you have a business of selling stuffed panda bears. Sales go up and down with the holiday schedule through the year, but on average you sell a little more every year. You are making money, and you are making a little more every year.
As sales and profits grow, you feel better and better about your little business. Then one day someone makes an unexpected offer to buy your little company for a lot more than you think it’s worth.
While you are thinking about this, they change their mind and buy something else. And, again, unexpectedly, someone else comes and offers you money for your company, but less than the first person did.
As long as you continue to sell more bears and make more money every year, why would you care at all about these offers? Why would you care if the second offer is lower than the first?
Unless you were planning to sell and they happened along at just the right moment, there is absolutely no reason to care.
You just keep doing what you do and the money keeps growing. You and the bears live happily ever after.
The stock market is a place for us to shop for companies with great business models that look to continue to grow for years to come and can be bought at a reasonable price.
Yes, the daily up and down gyrations of the market do change our statement balance. But as an investor, if I have paid very close attention to my holdings, then the opinion of others shouldn’t be that important.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to firstname.lastname@example.org These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.