The Single Greatest Investing Lesson I Ever Learned

The Single Greatest Investing Lesson I Ever Learned

A helpful piece of advice for enduring the 2022 bear market.

In 2020, Morgan Housel released The Psychology of Money . I think it deserves to be on the Mount Rushmore of investing books, especially for folks who believe history and behavioral psychology are critical elements for investing.

In the book, Housel has a section describing the stock market as a field where multiple games that have nothing to do with each other are being played at once. To quote from the book, “Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.” Here’s why this simple concept has lifelong impacts on your money and why it’s the best investing lesson I ever learned. Image source: Getty Images. Understanding a stock’s price

A stock’s price at a given time is merely a representation of the consensus value determined by buyers and sellers. But many of these players’ motives and reasons for buying or selling the stock are completely different from yours.

For example, you have retail investors and institutional investors. Retirees and college kids. Long-term investors with multi-decade time horizons and day traders. Short-sellers and folks who only stay on the long side. Options and futures traders and those who only buy shares in stocks. The list goes on and on. Housel’s point is that many of these games have conflicting influences over the price action of a given stock. And for that reason, the price of a stock seldom resembles its long-term intrinsic value. The tug-of-war between greed and fear

At certain times, the price of a stock can be dominated by greed, and at other times, it can be dominated by fear. In today’s brutal bear market , that means you have some traders who may dump perfectly good growth stocks and move into value simply because they are fearful and would rather own a stable business with a good balance sheet and positive free cash flow than take a risk on a company whose value comes from what it could be worth in future years and not what it is worth today. As a result, we continue to see exciting growth companies with a lot of potential get sold off heavily in the short term due to panic.

On the flip side, a lot of value stocks and oil and gas stocks were arguably underappreciated in 2020 and 2021, while some growth stocks saw their valuations get ahead of themselves. In those years, we saw investors take more risks and cast out companies with low growth. We saw a disregard for the geopolitical importance of utilities, energy stocks, and defense stocks in favor of bets on the next big thing. Real-world examples

The point here is that you can gain clarity by remembering that a lot of the money in the stock market is playing a completely different game than you are. Once you understand that, it’s easy to see why an excellent company like Amazon can fall by over 30% in a couple of weeks for little more than a mediocre earnings report and broader market volatility.

Let’s take the example a step further with a stock like Shopify ( SHOP 13.85%). Shopify closed the 2019 calendar year at just under $400 a share; gained tons of momentum during the pandemic as e-commerce grew and the gig economy went into full effect; ballooned to a market cap of over $200 billion and an all-time-high price per share of $1,762.92 on November 19, 2021; and has since slid to its current price of around $335 per share.

Shopify stock embodies several different games being played at once. On the one hand, you have long-term investors who believe in Shopify’s ability to add new merchants, have existing merchants upgrade to more expensive plans, and have those merchants earn more money which benefits Shopify. Then you have a series of folks who were only buying Shopify as a short-term “pandemic play” and don’t care about the underlying business — which was a big reason why Shopify stock ran up too far , too fast in 2021.

But today, you have yet another game being played — the game of losing patience by selling growth stocks that make little to no profit and seeking cover in safer names . Once an investor realizes these conflicting games, it starts to make sense why a stock like Shopify can go from boom to bust. It doesn’t make the […]

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