Benjamin Graham once said that in the short-term, the stock market is a voting machine but in the long-term, the stock market is a weighing machine. What this means is that in the short-term, the stock market is akin to a gambling den. In the long-term, the good companies will see their stock prices grow in tandem value growth. I’ve only read these kind of theories in books previously. After having learnt about investing and having started investing just recently, I am beginning to experience all these first-hand. Some of the fundamentally strong stocks that were grossly undervalued due to the financial crisis last year are picking up consistently now, even though they fluctuated up and down due to the traders in the market during that time. Some of the penny stocks that were far from being fundamentally strong in terms of cashflow and balance sheet, went up during the speculation period when people were talking about the green shoots. But, now their prices are back to their lows seen prior to the crisis. This clearly shows that the market is myopic in the short-term. There will be another example (about BP) quoted below.
During the DBS Vickers stock market outlook seminar in early July, I came across “investors” looking to make quick bucks from the market by asking for stock tips from the brokers. Also, during the talk where an analyst gave her views on the dark horses (undervalued stocks), people were fervently taking down the various stock names and stock target prices quoted by the analyst. Hopefully, they do their own thorough homework before ploughing money into the stocks recommended. Remember, your investing style and criteria will be different from the analyst’s.
This brings me to the interesting Facebook wall chat that my 3 NS friends and I had yesterday. We started talking about BP after the same friends read my previous post in this blog regarding dividends. Below, I have posted the screenshots of the FB chat that went on (names have been removed to protect privacy). Please take a look at the screenshot to understand what happened.
Interesting debate, wasn’t it?
One of the reasons for the myopic view among people is that we are trained by society to want results fast. That’s the reason why “get-rich-quick” schemes are so rampant. We would all have heard the tale on the hare and the tortoise when we were young. We learnt that the slow and steady wins the race. This is a perfect story that can be used in the stock market. The fast and the furious get killed in the market, while the slow and steady get rewarded provided they know what they are doing.
Unless you are a professional trader who has studied the market for years and years, I strongly feel one should not enter the markets out of hearsay, rumours and insider tips to profit in the short-term. Insider tips will no longer be insider tips once it reaches your ears, unless the CEO is your father or something. Even then, you have to have due diligence.
To really experience what I have just blabbered about, you can go to Google Finance and look at how different news moves a company’s stock price. One good example I saw yesterday was BP’s (ticker symbol: BP) as quoted on top. The US markets open at 9.30pm SG time in case you really want to monitor the market.
Thus, one should always invest in the market and not gamble in them. By investing I mean really digging up the annual reports of the companies concerned and analysing the company thoroughly by looking at the income statement, balance sheet, cashflow statements, chairman statement, etc. Also, look at latest company announcements and read news critically and think how the news will affect the company’s profitability in the long-term.