Today’s Take: Focus on the business instead of the stock price.
“Charles, what do you think about the stock market?”
That’s the one question that I’ve been asked more than any other.
Now, I totally get it. I have nearly 40 years of experience in the financial industry.
So, people figure: “Here’s a guy that has been investing and managing money in the stock market for decades — and has had some success doing it. Surely he must know what the stock market is going to do next.”
But whenever I get asked what I think about the stock market, my answer is always the same.
We’ve seen plenty of day-to-day swings recently. So, today, I want to talk to you straight. And what I’m sharing with you is very important.
It’ll make the difference on how you react when the stock market plunges or starts a long trek lower…
You Can’t Get Above-Average Returns Without Volatility
Stock prices will go up and down. That’s the nature of the stock market.
Despite the boom times we’ve had since the March 2020 lows — and the triple-digit gains that many stocks had — down days have not been outlawed on Wall Street!
Stocks are priced moment by moment by the market, and swings of 25% to 50% can happen in one day.
But you can’t get above-average returns without the volatility. That’s the price investors pay for high returns.
Over the past few weeks, the stock market has become more volatile. We’ve seen sharp down days — something we haven’t seen in a while. It won’t be long until we see a big down day.
And since we haven’t been subject to these kinds of down days in a while, it will prove unsettling for some.
Unfortunately, most investors think that if a stock price falls 20%, then something must be wrong with the business. I kid you not. They let the stock price determine the valuation of the business.
But I don’t. Here’s what I do — and what I recommend you do — instead…
Hold on to Great Businesses for as Long as You Can
Before I buy any stock for my own portfolio or make a recommendation to my subscribers, I have a pretty good idea of how much the business is worth.
I only buy when Wall Street offers it at a big bargain compared to its underlying worth … or sell when Wall Street offers it at a very high price compared to its underlying worth.
It pains me when I hear people tell me that they sold out of a great stock just because the stock price fell. It means they’ve let Mr. Market shake them out of position — not based on fundamentals, but on volatility.
I don’t want you to be greedy at market tops and fearful at market bottoms until you’re broke. So, don’t look at the market or the stock price. Instead, focus on the business.
If the stock price falls sharply, say 40% to 50% — which many times, it does — ask yourself: “Did anything in the business change?”
If not, stay the course. During down periods, all stocks fall. Realize that those who invest for the long term will make money. You want to hold on to great businesses for as long as you can. That’s the way to compound your wealth.
I truly don’t have any idea which way stock prices will go in the next week, month or year. That’s not a game I know how to play.
But if you follow my approach to focusing on the worth of the business, you’re going to come out ahead either way.
At the end of the day, you want to own great businesses that are bought at bargain prices. And then, you want to just sit and let them grow. It’s nothing more complicated than that.
Founder, Alpha Investor