There’s a corner of the Twitter universe that has become a “digital hangout” for investors. Affectionately known as FinTwit, this is a platform where investment professionals, hedge fund owners, billionaires, and even retail investors express their thoughts on investing.
I’ve become an avid follower of many of these FinTwit accounts and have learnt so much from them. In fact, I consider FinTwit a great avenue to learn from investors from all walks of life.
That said, there are some well-followed FinTwit accounts that have developed bad habits.
One of these bad habits is to sing about short-term gains on stocks.
For the momentum trader, this may be a justifiable indicator that they have made the right trades. But for the long-term investor (which is a strategy that most of these FinTwit accounts I follow prescribe to), short-term stock price fluctuations mean little.
Boasting about steep share price increases, without any meaningful change in the business fundamentals, is actually not a good indicator of whether your investment thesis was right in the first place.
Judging your investments
Just because a stock’s price has gone up significantly in the last day/month/year does not make you correct. If the stock price appreciation was not fundamentally backed up by strong business metrics, your investment returns could merely have been due to luck or simply a change in view among other market participants.
Two cases in point are the meme stocks: Game Stop and AMC. The two companies have seen their stock prices rocket this year as retail investors piled into them, artificially bloating their valuations.
If you made a big return on these two companies because you thought that they were good long-term investments and you think that the current stock price makes you right, then you are sorely mistaken. The stock prices of Game Stop and AMC increased largely because a hoard of retail investors pooled together to try to make a point. You were probably just lucky to catch the ride.
So how then should we judge if we are actually good long-term investors?
Instead of looking at near-term stock price fluctuations, I focus on whether the investment thesis of the underlying business is correct. What I consider a good indicator of good stock picking is when the companies I have a stake in report growing revenue, profit, and free cash flow over a multi-year period. This is a better measure of whether I’ve picked the right companies to invest in. If a company can grow its free cash flow at a healthy rate over time, its stock price will likely keep growing, as long as the initial valuation was not too expensive.
The bottom line
Near-term stock price fluctuations merely reflect a changing appetite for the stock among stock market participants and usually only represent changing valuation multiples.
A better indicator of long-term investing success is whether the underlying business continues to outperform and grow over many years. Ultimately, business performance, and not investor perception, will be the main driver of long-term sustainable stock price growth.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia does not own shares in any of the companies mentioned.