Do you feel elated when the stock you have bought goes up in price and feel depressed when the price drops? Or do you feel impatient when the price doesn’t go up or down but moves sideways for several months? Most investors have been through this emotional roller coaster. I’ve been guilty of this from time to time as well. The investor who masters his emotions and practices detachment from the price movements has an upper hand over the rest.
It is emotionally draining to see your stock go up in price by 0.5% today and dropping in price the next day by 2%. The emotional roller coaster that many investors feel makes investing difficult for them. This makes them sell a wonderful business in haste just because the price has been dropping for the past few days. The solution: Focus on fundamentals of the business and intrinsic value of the business instead of daily price fluctuations. Benjamin Graham once said that in the short-term the stock market is a voting machine, while in the long-term it is a weighing machine. Always remember, price is not always equal to value.
Investors should invest in a company that has strong fundamentals like good free cash flow, negligible or zero debt, competent and honest management and a company with wide moat, among others. Buy this business with a margin of safety. Keep it for the long-term and not focus on short-term gains. Since you are in it for the long-term, you will not be bothered about price fluctuations for the short-term. So what if the price goes up by 5% in a single day? So what if the price drops by 3% the next day? So what if the price stays stagnant for a few days? There isn’t a need to monitor your stocks everyday. Warren Buffett once said that one should buy a stock and imagine that the stock market will be closed for the next 10 years. Also, one should buy a stock as if he’s buying over the whole company and his family has only that business to depend on for their livelihood for the rest of their lives. By focusing on the fundamentals, we would not lose sleep if the stock goes down in price for the short-term and not feel emotionally drained. If the fundamentals are still intact, we can buy more at a cheaper price to bring the average price down.
If the stock price goes up, it doesn’t mean you are right in buying the stock. If the stock price goes down or moves sideways, it doesn’t mean you are wrong in buying the stock either. We would know if we have been right in buying the company after several years of monitoring the business’s cash flow, balance sheet, P&L statements and observing the management’s actions. We know we are right in buying the business when the intrinsic value rises consistently for several years. We know we are right in buying the business when year after year, the company posts increasing free cash flow and re-invests its earnings to compound its growth, thereby widening its moat.
The benefits of focusing on business value and not the price is that you will have your emotions in check and not sell potential multi-baggers out of fear. Emotions running wild is a sure way to kill an investor. Practice detachment from your holdings. Always remind yourself that you are in this value investing business for the LONG-term and short-term fluctuations are insignificant to you.