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SELLING THE DIP

May 19th, 2021

What exactly is the stock market?  The value of a company share can fluctuate by an enormous amount in a very little time.  What exactly does this price change reflect?

 

If a car company, for instance suddenly has a drastic drop in it’s stock, does that mean that the company is worth less?  Yes and no.  For instance, imagine what the value of the same car company would be without the stock market.  Say for instance the stock market simply didn’t exist, how exactly would you determine the value of the car company?  

 

You could count up all the nuts and bolts it has, get valuations on its factory space, the land it’s on all the hardware, and then perhaps average revenue and costs could be factored in, and perhaps maybe, just maybe we could arrive at a fairly accurate valuation for this imaginary car company.  So what happens when the stock drops by a drastic amount?  Does this mean they suddenly lost a factory?  Perhaps a container ship with a thousand cars being shipped over seas sank?  No, not at all.  In the short term, the stock market has no sense of these sorts of things regarding the actual value of a company - it’s wild fluctuation in the short term is proof of this: cold hard valuation in terms of physical value simply can’t fluctuate this much without catastrophic disaster.

 

So what does the stock market indicate?  Far removed from physical reality, the stock market reflects a feeling about the future.  The cost of a given share for a given company is an indication of confidence in the future ability of the company to perform and turn a profit.

 

When day traders try to make a quick buck in the markets, what they are actually doing is gambling on the shift in feeling and confidence about the future performance of companies.  That’s why it’s so hard to make a *quick* buck, and also why it’s so unwise to try and make that quick buck.  Feelings and confidence about a future that no one can predict is an immensely fickle thing - it is a bubbling chaos of human emotion. 

The only wise bet regarding the market is a long term one.  The reason is because confidence in the future performance of a company is -over time- based on past performance.  If past performance is good, then over a long enough timeline, the trend of confidence about the future will be positive.  As simple as this strategy is, it’s remarkably difficult for human’s to adhere to.  People consistently buy the high because everyone is excited about the stock, hence why it’s high, and then sell the low, because everyone is nervous about the stock, hence the low.  There are quicker ways to lose money, but this is one of the most confounding ways to do it.

 

Selling the dip means only one thing: either you didn’t understand the mission, or you didn’t believe in the mission represented by that stock.


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