The Madness of Crowds 2

The Madness of Crowds 2

So what’s wrong with selling off my positions if the market is tanking? Well, quite often you will find yourself selling out at very the bottom. Such is the pernicious nature of the stock market. It seems to have a life all its own where its sole function is to seek out our character weaknesses and feed off of them. It reaches a point where everybody gives up at once because they just can’t stand it anymore. It’s called capitulation, when everybody who is going to sell has already sold to the point where the tiniest bit of buying pressure pushes stocks up in price. The shell shocked public remains on the sidelines still trying to piece together what’s left of their shattered psyches. Next thing you know the market surges up and the stocks you once held in your portfolio have gotten away from you.

Remember why you bought your stocks in the first place. I’ll repeat part of the first paragraph of my last post…

'Okay, you've done your trend analysis on the essential metrics of a company. You've read and studied their business model and their competitive position within the industry in which they operate. You have studied the results of the way management allocates its excess capital.  You have patiently waited to buy the stock of this company when the marketplace put it up on sale. You have repeated this process over time and have bought several other stocks to build up an attractive, diversified investment portfolio filled with productive assets bought at reasonable prices. You've done everything right and feel good because although not all of your holdings have worked out, on the whole your investment portfolio has performed well and you are making good money.'

The price of a stock or a market of stocks in the short term is dependent  on the supply and demand of capital which in turn is influenced by how investors feel at the time. The price of a stock or a market of stocks in the long term is dependent on their intrinsic value (the present value of their future cash flows).

To make money in the stock market, think like a capital allocator, focus on the long term. Take advantage of the short term nature of other investors and buy their stocks when they are selling them off at a discount to what they are worth.