Saturday, August 13, 2011

Market Has Only Three Directtions.....

I'm gonna start off by talking c*ck. Stock market can only go 3 directions: upward, downward and sideways. I once told a person, if the stock market goes sideways over the next 10 years, I'll gonna be rich. And if it goes downward, I'll be even richer....very rich  (up to a certain point la). What if it goes upward, wealth will definitely grow but I'll have some headache and probably have to work a little harder. Yes, regardless of stock market directions, I'll be in winning position (with an IF of course). Too good to be true?

Just like a value investor would tell you, the lesser the risk, the more he made, a bear or a sideways market isn't that bad after all. In fact, it is a pleasant situation to be in. No, I am not short selling. I am just investing from a business point. "Investing is most profitable if it is most businesslike" Benjamin Graham. What did I buy when I purchase a stock? Not a paper, but a small piece of a business....a very tiny piece. Refer to my previous post What Happen When You Purchase A Stock?

So it doesn't matter where the stock market goes, as long as the business you purchase is good, you'll do fine ...are doing fine. So it becomes even better if the market tanks when the intrinsic value of your business is growing. And where does the intrinsic value comes from? From the business. It has nothing to with the market  (up to a certain point, because prolong bear market might impact confidence). In bear or sideways market, you can buy more of a value, bigger piece of a business at a lower or constant price. Aren't that good? If you read Buffett's Letters to Shareholders, you'll the pleasant situation he was in before 1982. Look at the graph below.

Graphs above show DJIA was almost flat but US economy grew till 1982. Wow! Too bad, this kind of situation is unlikely to occur in modern days as information is widely available now. But that's what probably got him rich. 

The conclusion is, if you invest in a business, what matters is the business not the stock price. The stock price only concerns you when you intend to buy or sell. Market value drops, yes....intrinsic isn't. And you are still earning because your business is earning. If earning continues to grow like above, your intrinsic value grow. If you own a bakery store which is doing well, are you gonna be concern with daily and minutes price quote from potential buyer? No.

Okay, some might say. It is nice if you are on cash when it crash. Well, if you invest from base on value, you are unlikely to find good or even reasonable deal in a bull market. And you'll be automatically hoarding cash because you just cant find a good investment. Some might even give you opportunity to sell. And that is what I meant by headache. And when opportunity like last week arrives, you'll know you have plenty in your war chest.   

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