Role of time and expectation in stock market
Investing is a battlefield where the opponents are our own emotions. Investors need to defeat their extreme emotion, in order to win the battle of investing. Extreme emotions are injurious for our financial health. It is during extreme emotions we make irrational decisions. it is fascinating to see how much, day to day market volatility is governed purely by human emotions and phycology. It seems obvious that emotions are our real enemy but in reality, even after knowing the fact that, our emotions are our true enemies, it is difficult to handle our emotions. The strategy to beat is market has been laid out many decades ago itself, but many investors find it very difficult to follow. The strategy is to, buy when others are selling and sell when others are buying. This again seems to be a simple and obvious thing but very difficult to practice in real life because our emotions won’t allow us to follow this simple strategy.
Stock market or Shop market
Many people treat the stock market as the shop market. People think that buying and selling frequently will somehow help them to make money in the market. This method can be considered to be good in shop market, where many people buy and sell things on day to day basis. Applying the same attitude of the shop market to the stock market is a bad idea. Investors must first realize that when we buy shares of any company then we immediately become a part-owner of the company. The CEO, CFO, company secretary, all level of managers and employees are working for us. But many investors consider buying shares of the company as a mere ticker symbol that they can see on the computer screen. This attitude is very dangerous for any long-term investors.
Role Of time in investing
Once we have the part ownership mindset, then we can be relieved from the day to day volatility in the market. Investors must understand that business takes years to grow but we are expecting their share price to move quickly in upside direction. The biggest risk in the stock market is the belief that it is easy to make money in the market. This attitude makes us do irrational things in the market.
Most investors underestimate the role of time in the stock market. We can make lots of money in the short run but true wealth is built only in the long run. Anything worthwhile to be achieved in investing takes time. As Warren Buffet says “How much ever-talented you are, you can’t produce a baby in one month by getting nine women pregnant.” Expecting the market to deliver a high return in a short period is very dangerous and having low expectation from the market is the key to financial success.
Investing is an expectational game
The stock market is a game of expectation. Expectation drives the shares price of the company. When the expectation is low, the stock prices fall and when expectations are high then prices rise. For example, consider that you go to some unknown movie in a theatre where your expectation for the movie is very low. If in case the movie was average then we might get satisfied of watching a really good movie but on the other side, if we got high expectation for your favorite star movie and in any case, the movie was only average, then you would get really disappointed by the movie.
The same thing applies to investing also, if we investors expects the company to grow at 25% for next years but the company only grows at 10-12%, then the stock price of the company would be severely beaten down in the market. But if the investors are expecting a certain company to grow its profits only by 3-4% but the company grows at 8-10%, then the share prices of those companies would move in upside direction. In short, investing is an expectational game.
Key Takeaway for investor
As an investor before buying any stock, we must first analyze, what is the expectation for this company from the consensus. Decoding the expectation is the key job of a skillful investor. Once we can deduce the expectation then we can analyze whether the expectation is too high or low in accordance with the fundamentals of the company. if the expectation is too high when compared to the fundamentals of the company then we may not buy the company if not we buy the shares of the company.