July was a very good month. Everyone is up.
Why does the stock market move? It doesn’t seem to be directly tied to the economy, because while the economy is lousy, sometimes the market goes up. At its core the movements of the stock market are all the traders’ cumulative predictions about the state of the economy in the future. Traders that think the economy in the future will be good will buy, which drives the price up. Traders that think the economy in the future will be lousy will sell, which drives the price down. However, the perceptions of those traders are not necessarily based in truth. They may be based purely or in part on the headlines of the day.
You hear on the news a lot of things about the world. One question you might have is how those things affect the stock market. In truth, they can be both extremely significant and not. On their own, most news doesn’t shift the stock market by much. The intrinsic value of a stock is tied to the value of the company it’s attached to. If news doesn’t meaningfully hit the company’s bottom line, then stock movements are temporary. However, people read too much into news and because they think the news is significant, they can make it significant. In many ways, perception determines reality. Something is significant if people think it is. So, while most irrelevant news is brushed off by the stock market, sometimes, its clung to and blown completely out of proportion to its real effects. Also, sometimes significant news is not reacted to properly and it is transformed into insignificant news because of the power of perception. The stock market in the short run can be extremely irrational. In the long run, truth and significance tends to prevail, but in the short run (which can be years) the stock market contains a lot of noise.
We recommend that you ignore that noise. Find investments that have intrinsic value and stick with them. Any short-term movements are likely temporary. Of course, it’s possible that things won’t be temporary, but chances are it will be. Obviously if the company starts performing badly, you should react, but until the company’s bottom line is affected you should stick to the plan.
If you have any questions about your investments, please call at any time. We sincerely hope you got value from this newsletter.
We appreciate your business and trust.
Dan and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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