The insanity of the stock market

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As soon as people hear what I do for a profession the common line of questioning goes something like this;

“Given what you do, is now a good time to buy?”

“Is now a good time to sell?”

“Given all that is going on in the world should I be in the stock market at all?”

And no matter what you say, people aren’t really listening, the response is inevitably some version of the following;

“I think I’m just going to wait it out until things turn around!”

Although frustrating I can understand this emotional reaction as investing isn’t easy and involves so much uncertainty. PLUS we are talking about your hard-earned money, which you most certainly do not want to throw away. But trying to find an answer to “when is the right time” is the equivalent of trying to read tea leaves for signs of what the future holds. It is simply unknowable. But perhaps if you take the view that I do and that so many of the Greats have expressed, that the stock market is a place of madness, it will help simplify your decision-making.

Let me prove this insanity with an anecdote;

You decide you want to buy a house.

You spend time thinking of the type of house you want, the neighborhood you want to live in, what you can afford, etc. After much thought, you draw up your wishlist. You then go house hunting looking for your dream home.

Now you don’t buy the first house you see. It may take days, weeks, or even months to find houses that interest you. When you do eventually find one that matches your wishlist you look at houses in the neighborhood and the price they are selling for to determine how much you want to pay. Finally, you decide you want the house and you’re prepared to pay R2.5 million and make an offer, and… “HOORAY” the seller accepts your offer! You now own a house. It’s Monday, by the way.

On Tuesday, after you move in (quick transfer!) there is a knock at the door. “Hi, I would like to buy your house and am prepared to pay R1.5 million”.

“You’re crazy!” you respond and close the door.

On Wednesday, there is another knock at the door. “Hi, I would like to buy your house and am prepared to pay R1.4 million”.

“Leave me alone!” you reply slamming the door harder than the day before.

And on and on this goes day after day until you stop answering the door.

Then one day you hear a knock and for whatever reason, YOU decide you would like to answer,  “Hi I would like to buy your house and am prepared to pay R7.5 million”

“You’re crazy! SOLD!” you shout not believing the price you got.

It is a silly story, I know, but this is exactly what millions of people are going through millions of times each day, but this isn’t happening with houses, it is happening with companies, companies listed on stock exchanges.

Bringing this back to the world of investing;

I decide I want to buy a company.

I spend time thinking of the type of company and after much thought, I draw up my wishlist. I then go company hunting looking for my dream company/investment. The best place to go shopping for businesses, especially when I can’t afford to buy the whole business, and which is the most accessible to both you and me, is the stock market.

(A quick word about the stock market….The stock market is an open market where individuals can buy and sell companies, and other instruments (but that is for another discussion). You cannot buy the entire company on the stock market but you can buy one share at a time which allows you to become a part owner of that business. When you buy a share, unlike buying a house where transfer takes weeks, a share transfer takes seconds.)

Now I don’t buy the first company I see. It may take days, weeks, or even months to find a business that interests me. When I do eventually find one that matches my wishlist  I look at the offer price, and I look at companies in the industry (neighborhood) and the price they are selling for to determine how much I want to pay. Finally, after much research, I decide I want the company and I’m prepared to pay $13.00 per share. I make an offer, and… “HOORAY” the seller accepts my offer! I am now part owner of a business.

I am sure you see the similarities between shopping for a company and a house. Now, where this differs from buying a house is the speed of the transaction, it takes seconds to buy a share, so unlike our unrealistic example of the daily knock on the door of someone wanting to buy your house, within a second I get an actual knock on the stock market door. 

“Hi, I would like to buy your company (share) and am prepared to pay $12.00 per share”, a second later I have another knock on the door,

“Hi, I would like to buy your house for $11.99 per share”, a second later….

And on and on this goes second after second, minute after minute, day after day.

This is reality, this is the actual mechanics of a liquid market. It is meant to be there for our convenience, nothing more and nothing less, but where the insanity comes in is instead of saying “Get lost” to every knock on the door we say to ourselves,

“Why do they want to pay $11.99 per share!.”

“Perhaps I should sell!”

“The whole market is down so I think I’m  going to sell and wait it out until things turn around!”

We have the option to not answer the door however we choose not only to open to every knock but rather stand at the door all day looking to see who will knock next. In other words, we sit there watching the market and the prices second by second. Insane!!!

If you are still reading hopefully the point I am trying to make is clear! The stock market is a fantastic mechanism that allows us to buy and sell shares/ownership of companies with ease but it is nothing more or less than that. It is not something we are meant to watch every minute of every day with panic or exuberance when the share price of our company ticks down or up, it is simply there for us when we WANT to buy a company and therefore there for us when we DECIDE it is time to sell.

Investing in a nutshell

If you decide to invest in companies and decide to invest in companies listed on the stock exchange, simply because of the ease of transacting, you then need to do the thinking and research behind what kind of company you want to own, why, and how much you want to pay, just like you would if you were buying a house. Invest in a company ONLY when it matches your wishlist and is at a price that you believe is attractive.

When to sell

The market is going to go up and the market is going to go down but just like selling a house there really should only be a few reasons to sell your shares;

  1. When you find a better company to own (upgrading your better house).
  2. The company you own deteriorates in quality, (Similar to your house leaking and you don’t want to fix it)
  3. Someone offers you a price that is too good to turn down.

So…

“Is now a good time to buy?”

“Is now a good time to sell?”

“Should you just wait it out until things turn around!”

Hopefully, you can see now that in reality, the above statements are irrelevant to your investing decisions. When the interest rates in Malaysia increase is of little concern to you when you are buying a company that manufactures movable homes in Texas just like you don’t give it a second thought when buying a house in Johannesburg if oil was discovered in Maputo. Just like it doesn’t matter if you buy a share in a company today and the share price halves tomorrow as it allows you to own even more of the company at a cheaper price.

Obviously, I am oversimplifying but you get the point. Investing is about becoming part owner of a business so take your time finding the right business to buy and ONLY answer the door when it suits you.

Investing takes time, it takes experience, but most of all it takes discipline and patience. We know you are busy following your passions. Investing is ours, so let us do the hard work for you.

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