This is something that I have observed: investors’ confidence in their stocks wavers with the price movements.
If prices are going up, they feel very confident about their picks.
When prices are going down, they lose their confidence rather quickly.
They are the same stocks and nothing much has changed, or that the businesses may not have changed as much as the share price suggested.
Benjamin Graham said, “investment is most prudent when it is most businesslike.”
The idea is to separate business value from the share price. They are two different things.
Graham went on to suggest that we should think of the market as a manic-depressive person who can be optimistic one day and totally pessimistic on another. That is what made the share price swing.
Indeed when the volatility happens, many investors’ confidence swung with Mr Market’s mood.
This is all too human because we are sentients. If someone close to us is unhappy, we feel it too even without the person saying anything.
This sentient ability is what caused us to make sub-optimal investment decisions. To be totally rational is asking us to be less human – void of feelings. It is easier said than done.
Stock markets have enabled buying and selling shares easy but the constant flashing of prices have affected us negatively. Sometimes I wonder if the liquidity helps or harms us more.
Think about running your own business. There is no share price fluctuating in the background. You judge your business based on how well it is doing – revenue growth and profit margins. There’s no distraction.
If someone gives you a lowball offer, you will just dismiss the offeror and it won’t affect your confidence in your business.
Same for your property. You won’t entertain if the offer is way below what you value the house for.
When the prices are not readily available, we have the ability to focus on the value.
But the stock market made prices obvious and value becomes an afterthought – investors know the price of everything but the value of nothing.
Buffett was wise to say, “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
So don’t check the share price regularly if you want to keep your sanity as a long-term investor.
