Irrational behaviour: being happy when stock prices rise

Friday 15 July 2016 23:03
Posted by owq 0 comments
As observed on HardwareZone SSI. Why are people so happy when stocks are getting more expensive? In a bear market, you're going to earn more money! As you reinvest more dividends or other income, you compound your capital at a cheaper rate. Of course it's a different story if you urgently need to liquidate. Then you shouldn't be buying stocks?!

In a bear market, usually pessimism will cause stock prices to depress more than their fundamentals deserve. I mean, a couple of quarters of 20% reduction in earnings simply shouldn't deserve a >20% reduction in price! After all, you're paying for the cash flows of the company in the long term.

So stay invested and don't market time, because eventually reversion to the mean will occur, and you don't know when it will occur.

Value stock vs growth stock: are they really different?

Monday 11 July 2016 09:48
Posted by owq 0 comments

From Investopedia:
"A value stock is a security trading at a lower price than how the company’s performance may otherwise indicate."
"A growth stock is a share in a company whose earnings are expected to grow at an above-average rate relative to the market."
 I have always thought that "value stock" and "growth stock" don't really mean anything. All I am concerned with is that I'm paying less for the value that I get. If I'm paying less for the expected growth of a company, then it is a value stock. Of course, it's hard to predict the future, so it's good to be conservative in case you're wrong.

Price is what you pay, value is what you get. And value is a function of all the cash flows the company will give in the future, and that is affected by growth. However, it is important to see things on a per-share basis, as earnings may shrink on a company level but increase on a share level. So rather than look at growth on a company level, we should look at growth on a share level.

In the end, it is really just buy low and sell high. A simple concept, but yet hard to act on due to our human biases.