As published in the Racine Journal Times | October 1, 2014
I’d like to share a prediction in this month’s column with you. I think stock prices will go down more. After almost six years of gains, it seems almost inevitable that stock prices should at least reach a plateau or even go down. They can’t go up forever, right? If I’m correct that stock prices will go down, my real question to you is, so what?
Unfortunately, what I don’t know is when stock prices will decline which arguably allows anyone to make the above prediction as only a fool thinks prices increase forever. Nor do I make any attempt to determine the timing as people who focus solely on the direction of the stock market confuse speculating with investing. The confusion between speculating and investing leads to a lot of unnecessary anxiety and poor decisions when it comes to managing your investments.
While it may not be the textbook definition, I view speculating as making investment decisions based on short-term predictions of where the market is headed or which individual companies will outperform the overall market. On the other hand, investing is focusing on the long-term reality that companies or economies generating increasing profits will lead to higher valuations. Of course, long-term could mean a year or a decade before the price reflects the company’s value which is why investing is an inherently risky proposition.
It’s important to remember what investing in stocks actually represents. With each purchase, you’re actually buying ownership in a company which entitles you to a proportional share of the company’s profits. Imagine buying a local company generating significant profits. If you were the sole owner, you would be entitled to all the company’s earnings. Owning stock shares is similar except you split the profits with all the other shareholders. One important distinction between the local company and publicly traded companies is that you’re constantly barraged with the price of the publicly traded company which doesn’t always reflect the underlying value of the company.
Most small business owners aren’t constantly buying and selling companies yet many people who own stock do just that. Long-term investors view themselves as owners of the companies and act accordingly. Just as a real business owner won’t sell their company at the first sign of trouble, nor should investors.