I believe that when it comes to the stock market, price follows value. So, it stands to reason that investors who are buying a piece of a business (a stock) below a fair and reasonable price, are buying ahead of the market. The price traded in the day-to-day gyrations of the market will eventually follow.
Sure, traders may dominate the minute-to-minute, day-to-day and even week-to-week price movements. However, value investors effectively dictate where the market goes in the mid to longer term (6 months +) by investing in businesses with growing earnings and bright futures.
Taking your cues for making investing decisions from daily price movements is usually a poor decision. It effectively means that you are following the market instead of beating the market. Sometimes prices of stocks might go down because the people selling their shares in a business listed on the ASX are using the money like an ATM. Perhaps they need to pay for the kids’ school fees, or renovate their kitchen, so they take money out of the market, not necessarily for an investment purpose but a life purpose.
If you want to beat the market regularly and sustainably, simply buy good quality stocks when you are certain quoted price on the screen is at a discount to an estimate of intrinsic value. Then you will be a market leader and set up your financial future with enjoyment and less stress.
And conversely, being prepared to divest stocks accordingly, when the market pushes the price of stocks you own beyond a fair and reasonable price, will confirm your profits and keep you leading the market.
Subscribe to Edge7’s ASX share valuation service if you want to know which stocks are trading at good discounts to their intrinsic value each week. Buying below value and selling above value is a great way to go in today’s market.
This article is published by Dean Mico.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.