All it took was a few good sessions on Wall Street and some traders have started to declare that the bear market is over. I kid you not when it was only last week that the same people were warning that Armageddon was just around the corner. To call these people schizophrenic might be a bit harsh. But I can’t think of a better way to describe them.
Trouble is, they are traders rather than investors. Their decision to buy or sell is based on what others are doing. So, rather than to dignify them with a medical label such as schizophrenia, we should perhaps just call them lemmings. They are happiest and probably at their most comfortable when they do what others are doing.
However, real investors must learn to think differently. Benjamin Graham said that we are neither right nor wrong because the crowd agrees with us. We are right because our reasoning is correct. But it takes a tremendous amount of courage to go against the crowd. That said, it can help enormously if we can identify the right metrics to follow.
On that point, the price of a share is precisely the wrong metric to follow. Lemmings will disagree because they are responding in a similar way that Pavlov’s dog responded to a conditioned stimulus. In other words, they believe that a rising share price must be a good thing and a signal to buy. Conversely, falling share prices must be terrible and a signal to sell.
However, share-price movements tell us nothing apart from how a collection of traders are reacting. It tells us nothing about the performance of a company. But lemmings can’t help themselves, in much the same way that Pavlov’s dog was conditioned to respond to food even though there was no food to be had.
The “food” that investors should be interested in should be earnings. Peter Lynch once quipped that a remarkable investment is when the earnings per share in a single year is greater than the price that we paid for the share. As an income investor, I would say that a remarkable investment is when the cumulative dividends earned from a share is greater than our investment in the share.
Whichever way we want to look at it, the fundamentals of a business, namely, its earnings, its cash flow, and its dividend payout should be the focus of our attention. So, enjoy the second-quarter earnings season. It will tell you more about the companies you are invested in than the gyrations of the market.
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