Friday, 10 May 2019

The Power of the Stock Price

If you ask a fundamental investor about the importance of the stock price, you will probably get a look of disdain. He will tell you that valuation matters, not the price. Price alone conveys little. Plus he would advise you not to pay attention to the price; just worry about the fundamentals.

The fundamental investor is right. But the problem is that his wisdom is seldom followed. Interestingly, he himself also fails to follow it. You like it or not, stock price is the uncrowned champion of the stock market. 

It is the price that creates the narrative. Recently, a company announced its results. Analysts felt that they were mediocre. The stock price should have fallen. The next day, it didn’t. On the contrary, it climbed a fraction. The narrative quickly reversed. After all, the results weren’t bad either. 

The problem comes when the stock price becomes the foundation of making a judgement. Because the stock price of a leading bank has fallen, analysts have eagerly engaged in a fault-finding exercise. Similarly, because the stock price of a leading consumer-durables company has been on an up-move, analysts are ignoring its valuations; everything’s hunky dory with the company.

Apart from creating greed/fear in investors, stock price also drives their confidence. It’s not their own analysis or the company’s numbers; it’s the stock price. A falling stock price makes them doubtful; a rising stock price makes them cocky. 

What’s the solution then? That’s not easy. Given your biological wiring, the stock price will always influence you. Better don’t see it. Once you have a strategy in place, follow it in letter and spirit. Check your portfolio once a week or fortnight. No matter how good an analyst or investor you are, at a subconscious level, the stock price will influence you if you see it by the hour. That’s the power of the stock price.

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