When the stock market behaves like a yoyo it’s good to remind yourself of what a share price really is and that is a daily offer from someone to buy and / or sell you a business. If you are the business owner why would you ever entertain a lousy offer to buy your business. You would simply laugh it off. Private equity / business owners have an advantage in not knowing and / or caring what someone is prepared to pay them for a business they have no intention of selling.
So why then do investors panic when the Naspers share price falls from R 3000 to R 2500. Does it matter what the share price is today or tomorrow. You still own the business don’t you. Who cares what some fund manager in New York is offering you for your shares. This explanation may be a bit simplistic, but the point I am trying to make is how our fears can trigger irrational behaviour to the point where you accept the insulting offer from the NY fund manager and sell your shares.
The stock market can sometimes be mistaken for a casino particularly when shares prices are falling for no good reason and it feels like you are losing all your money. When this happens its good to stop and remind yourself what a share really is and that is simply a part ownership of a business, which entitles you to a share in profits.
Investors spend much of their lives worrying about a repeat of the 1929 black Monday crash, when we have been told stock brokers jumped from windows after losing everything. The reality is you can never lose everything, the share market simply cannot go to zero.
Share prices behave completely irrational in the short-term, but it is not the share prices, which are behaving irrationally, but rather the investors behaviour that is irrational resulting in the volatility of the share prices. The only way the stock market can go to zero is if you and I stop living, we stop earning and spending money. If we stop buying groceries, we stop using our cars, we stop eating out, we stop going to the doctor, we stop buying clothes, we stop using the internet, we stop using cell phones, we stop flying, i.e. we stop breathing….
If this happens then the share’s we own in the businesses producing the good and services we were using become worthless, because these businesses no longer have any profits for us to share. If you fear this may happen then maybe you should think of selling your shares and building a bunker under your house.
Mcomm, CFP®, HdipTax
T. 021-851 3746