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5 August 2015
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Thank you to those who read, left comments or contacted me directly after my last blog post Three Biggest Myths of the Stock Market. It’s clear that some of the myths had rung true among our readers. From this it also became clear that there are more stories that people have heard and struggle to decide whether they are fact or fiction.
So I felt it would be helpful to write a follow on post covering a couple more common myths about the stock market. So we will resume on Myth No.4…
Now I must admit, this myth is very similar to point number 3 in our previous post (Losing stocks will come back), but it is on the other side. The last myth on this topic was written for those who were blindly optimistic, hoper’s. This myth on the other hand, is for those that have pessimism to their stock watching.
A stock that has had a strong run recently is surely due a huge correction, it will come back in value again to a cheaper price, right… Right!?
Well, no. There is no rule that states this will always happen; it’s possible of course, but by no means with every stock. Unfortunately, or fortunately, depending which side you are on, the stock market does not abide by the laws of gravity – what goes up must come down, anyone? The market does however, abide by supply & demand to determine price movement.
As an example, consider a well-known company like Apple.
Apple’s stock price from 2005 to 2015 went from $6 to $134 per share at its high, anyone who held back from buying in to this stock during this period due to thinking that the price was going to return to its initial lower value after reaching one of many of its ‘all-time highs’, would have seen you miss the $128 movement (and consequently the 1986% return that accompanied that move).
This is not me trying to say that every stock will consistently rise in value like Apple has, nor that there hasn’t been correction’s in Apple’s value over the 10 year period, because there has been times where it has pulled back. My point is mainly to not have an expectation that they will always fall in value just because the price looks ‘too high’.
As I mentioned above, corrections do happen in periods where investors don’t see value in a stock, or circumstances change for the company. The point is the price of a stock’s value is a reflection of the company and the sector; a strong company in a good sector does not have to come down again if the potential for future growth is there, just because “it will pull-back because it seems expensive”.
It is fair to suggest that there can still be good value in a company, even if it were trading at what looks like the ‘top’. This is where your ability to research and analyse will come in to play. Take a look at our previous post on price vs. value for a more in depth look at the reasons behind this.
I felt this point worked very well with the point in the previous post, where you would only wish to buy in to pull-backs to get a cheaper price, buying at the top is not necessarily something to rule out either.
Ok, so the reasons for buying what you hear about in the media can seem obvious. The coverage could equate to increased volume, increased volatility and the potential for price movement, for good or bad reasons.
But what you are actually doing is simply going on the wisdom of crowds, as opposed to the opinion of an expert. To help better define what I mean by this, I will break down the paragraph in to three digestible parts. Firstly, depending on where you get your news media from, it can quite simply be out of date by the time it arrives in front of your eyes or ears.
This can particularly be the case when reading news published articles, the news will have been released and then written by a journalist and then finally published for distribution.
This brings us to the second potential outcome of news investing, the larger institutional companies will potentially have had the chance to take advantage of the news before it is able to be capitalised on by the reader of a published news piece. Essentially, the news could be priced in to the stock by the time you look to make a change to your portfolio or invest in to a company.
Thirdly, another instance that we have to help people understand nowadays is the ‘froth’ that is posted in the news world, a lot of PR companies have an invested interest to keep particular news pieces or media shining in a positive or a negative light to be able to benefit them, depending on the company or topic they are covering.
I must stress this is not a means of market manipulation because writing biased news is fine, but more a influenced angle of news releases which will blur a lot of investors thoughts of what is happening to a company.
This is not always the case, but there will be articles which have a strong bias in one way or another that you actually leave the article feeling certain emotions about a company you don’t know anything about!
Well, if you take anything away from this point it is that whilst companies in the news can potentially be good companies to look into for your own portfolio, just because it is getting a wide-coverage it doesn’t mean the company in mind has any real relevance to what your own objectives are, or that all the news you read is published to provide you factual information, or whether it is more there to cause a bit of a stir.
What you could do is watch stocks that receive positive news flows, perform your own thorough analysis on them and then be able to identify whether that company represents a good addition to your portfolio according to your selection criteria or strategy.
A dramatic scenario that could play out is the hyper-inflated stock falls after the initial hype is over, picture yourself buying in to a particular stock on the back of a few news releases that just plummets once the ‘hype’ is over, you will be left hoping and praying the news you were reading comes true – is it worth the risk?
So there we are. Two further myths which you may be familiar with. Naturally, there are all sorts of hang ups and concerns that you may face with your decisions to invest or what you may even tell yourself about the stock market, and they’re understandable. It’s human nature as the stock market is an environment of risk that triggers our ‘fight or flight’ response built into us over hundreds of thousands of years of evolution.
Each day I hear what may be an issue for a lot of people, I enjoyed discussing with those that got in contact with me over what some of their longest held myth beliefs were. As always, I will be happy to either shed some light or help you see what benefits and risks the stock market has in a more detailed way.
Who knows, if there are any more concerns that I see mentioned I’ll be sure to mention them on here again. I already have an idea of two others I would like to cover!
Drop a comment or of course get in touch with us!