Look at this. This is a stock price chart. Not from today, given the market’s crash. But just a random stock price chart.
Now look at it another way. This is not just a stock’s price. It is, borrowing from the legendary John Bogle, a “giant distraction to the business of investing.”
Long term investment returns are created by how businesses perform, but most investors make their investment decisions based on where stock prices have come from and where they may be going.
Anyways, now look at the following chart. This is a stock’s price plus four other “irrelevant” facts that drain most investors when they consider their investments.
These four irrelevant facts are –
- Price the stock sold at its all-time high,
- Price you paid for the stock,
- Price the stock quoted at its highest since your purchase, and
- Price as on today
None of these matters when you are deciding what to do with your stock investment today. The only thing that matters is where the underlying business stands today and where its earnings and cash flows may reach 5-10 years down the line.
Of course, in the long run, stock prices are representative of the value created by businesses. But they are just that, representatives.
Actual value does not gets created in the world of stock market, but in the world of business.
In fact, like Mr. Bogle said, “the stock market subtracts value, due to all the costs we pay to play the game.”
One of those costs include the stress you take looking at your stock prices, which are plain irrelevant.
So, in short, avoid looking there. Look instead at the businesses you own, the managements that run them, and the value they may create over time.
That’s about it from me for today.
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