The Ups and Downs

We will get into that in just a moment; but first I want to add something that I missed in last week’s post. I talked about the things we are looking for that determine the quality of a company. Today I realized that I missed “market share”. In simple terms, it’s the share of the market the company holds in their particular business. Amazon, for instance, holds 37.8% of the market versus their competition. Walmart is next with 6.3% of that market. Do you know who #3 and #4 are? Apple and eBay, both having less than 4%. I would challenge you to start a company to compete with any of these giants. They would eat you alive. They have support giving them the ability to break anyone who tries to compete with them.

Now we can move on to the “ups and downs” – the “downs: being the hardest part for investors. If these companies are so profitable and basically bullet proof, why does their stock price ever go down?

The markets are a funny thing. What are the things that drive it? In my opinion, the two biggest drivers are GREED and FEAR. With SUPPLY and DEMAND also playing a big role in the price of stocks (notice I said “price” not “value”). Then there’s the “PROBLEM DE JOUR” – just turn on the news; there is seldom a day we don’t hear some bad market news – news that can throw a real scare into most investors! If you pay close attention, today’s problem is quickly forgotten and a new one is reported the next day. It really plays on one’s emotions and EMOTION IS THE ENEMY OF RATIONAL ARGUMENT. To understand that better, just think of the number of times you’ve heard people say “if that were my kid, I certainly wouldn’t let them get away with that” Guess what? You are not emotionally tied to anyone else’s kids so you can see the situation rationally. The parent who is emotionally attached to their child just wants the best for them but often has trouble seeing what that is. We are kind of like that with our money. Actually, we are exactly like that with our money as we ARE emotionally attached to it; after all, we’ve worked hard to make that money.

Then there are all the economic factors including interest rates, unemployment rates, government regulations, etc.) that keep the markets moving up and down. Up next – profits; companies, as well as financial analysts, will estimate quarterly profit and investors will buy shares based on these estimates. If companies don’t meet the estimates, it will often drive the price down. If they do better than the estimate, it will drive the price up. Part of that is the greed factor that wants to get in before the price goes up. If the news reports some very good company news, that too will drive the price up. If the unemployment rate goes up (there are more people out there looking for work so they will work for less bringing down company expenses) the stock price will go up. No one complains when stock prices increases (bull market); as a matter of fact, if these increases last for too long, people tend to get greedy and buy more and more stock which tips the supply/demand scale and drives prices to a level HIGHER than their value.

So what’s the flip side – and the one that tends to sell more news? The Bear market. If interest rates or gas prices or labor costs or _________________(fill in the blank) increase, expenses are higher therefore profits decrease. Then there is the bad news – the “Problem de jour” – often political (a change in power; political unrest; policy changes) but also things like Y2K (the scare was that computers would not recognize the year 2000 and we’d lose everything); the housing crisis in the states where houses were worth less than the mortgage owing so people just walked away leaving the banks with a huge inventory of houses that weren’t selling (there is more to that story but not enough room to explain it in this blog) and more recently – Covid! These, and many other events, have created fear triggering a huge sell off of shares. Now we have an increase in supply and a decrease in demand. And what happens when there is large supplies but little or no demand? The price drops. The experienced, savvy investors LOVE these situations as they can buy discounted shares and just wait until the market turns around so they can sell at very attractive profits. Think about that - you cannot sell something if no one is willing to buy it. Value is more constant; market price is only what a buyer is willing to pay and what a seller is willing to sell for. It often has little to do with value. Think about that the next time the markets scare you and you have shares of quality companies and feel like selling them. Selling them would be a case of making your money work hard – FOR SOMEONE ELSE!

If you want to do well in the stock market, you need to follow the advice of Warren Buffet – “Be fearful when others are greedy and greedy when others are fearful”.

NEXT POST – When to buy & when to sell