“Thats great, but what will make the stock go up?”
Stocks are binary. They move up, down, or not at all. When analyzing a business it is as if you are given 100 puzzle pieces to complete a puzzle that only requires 35. The hard part is not solving the puzzle, but being able to discard the pieces that don’t belong in the final assembly.
This post is going to focus on the puzzle pieces you should ignore.
#1. Everyone on CNBC.
Does this need explanation? No?
If you want to own excellent companies in the modern era, you have to pay a pretty penny for them. These companies are expensive because they are powerful and valuable. Even companies that are not profitable and are burning cash while growing revenues at 100% annually are expensive. Why? Maybe the market is smarter than people would like to admit. A quick example was when everyone was bearish on Tesla due to its valuation and financials. During that time Tesla was building an amazing brand and product. How are those bears doing now? The same can be said for Amazon. A lot of investors missed out on Amazon because they could not justify the valuation as the company continued to dump money into the business instead of showing it as earnings. Well, again, you must separate yourself from your sworn oath as a prudent value investor. Value does not mean cheap, it means cheap in relation to ten years from now. It is your job to not only look at financial ratios, but to think hard about how this company will look and operate in the future. Ignore value in the sense most people regard it.
#3. Quarterly reports.
Having a long investment horizon allows you to ignore the fluctuations caused by quarterly reports. Yes, it’s fun to watch the stock bob up and down after hours. I’m guilty of doing it but in the long-term it’s hard to really take quarterly reports seriously. These reports are more for the circle jerks on Wall Street who need something to keep busy with, and less so for the long-term investor.
#4. Insider buying and selling.
I want to start by saying insider ownership is always a good thing. But don’t let the CEO, or CFO, or anyone close to that company scare you out of your shares because you see them taking action. A lot of times these transactions are planned ahead of time and have nothing to do with the performance of the company or stock’s movement. The opposite is also true, and if you see an insider loading up on shares, you cannot assume it means the stock is going to rise. Just because these guys are running the company does not mean they are savvy investors. Let them work, and you think for yourself.
#5. General market volatility.
The market bounces around. It is just something you have to become comfortable with and accept. And the only way to do so is to practice with real money. Emotional control is huge in investing. If you can control your emotions and allow the market to bounce around without a care, you are a big step ahead of most individuals. That being said, besides using market panics like the recent COVID sell-off to load up on shares, you should ignore the market, and quite frankly your own positions. If you don’t care seeing a position go up or down 20% in a day, then you are in the right frame of mind.
#6. How much the stock has moved.
This one is exceptionally difficult psychologically speaking so I will give a personal example. I am a huge fan of the company Shopify $SHOP. I liked just about everything about the business and was ready to buy in late 2018, but did not pull the trigger. The reason I did not buy was because in twelve months the stock had gone from $25 a share, to $100 a share at the end of 2018. I figured I would wait for a pull back before I jumped in and purchased some shares. Well, here I am looking at the current share price of $1,096 wondering what went wrong. Stocks can always move higher, and they can always move lower. It is never too high to buy. Do not let past movements scare you out of adding a great company to your portfolio.
#7. The business cycle.
This an interesting one that I have seen a lot of people get hung up on. Even Howard Marks, who is one of my favorites, seems to pay great attention to the business cycles. And I am not saying to totally ignore this one, but if you see an outstanding company at a price you think is fair in relation to what it will do in the future, jump on it regardless of where we are in the cycle. As long as you have a long time horizon, and your assessment is correct, you should give the business cycle little thought. The market will do what it’s going to do. It is out of your control. So don’t miss out on an opportunity because of where you think we are in the cycle.