How’s the stock market doing? How many times have we heard that question? What does it really mean? Another question we hear newscasters using with investing professionals is: “What’s the best way to play the market”? Is investing now a game we “play”? What has happened to long term disciplined allocating of capital into businesses. Did the cryptocurrency craze and meme stock mania and change the way we consider this asset class altogether? To really understand this concept let’s start at the beginning. We need to ask the question:
What do I own?
Stock is the technical term used to describe the share that an investor owns. A mutual fund is simply a diversification tool that allows the investor to own shares of many different companies in one vehicle. Some of our clients may say they own mutual funds. Others may say they own stocks. We say they own a percentage of a business and are entitled to a share (pardon the pun) of the profits and cash flow of that business. In fact, we would say there is no “stock market”. There is a market, of stocks.
Whose prices?
Every day many newspapers report the closing price of the previous day’s stocks. For the impatient investors, there are apps that provide real time quotes of those stock prices. What does this mean to you? Well, probably nothing if you’re happy with the company you own. The price shown is simply the last price that a seller and a buyer agreed to in a transaction. If you own the stock, and believe it is worth more than that price, it is not your price. That is someone else’s price. Someone else decided to buy/sell at that price, not you. If it helps, think of your primary residence. The value changes daily depending on the market. If you’re unwilling to sell your home at the “market” price, it really doesn’t affect you.
Does it matter?
In a word, absolutely! As an investment professional with over 30 years’ experience working with retail investors, I can tell you that, investor behavior is the key driver in portfolio returns. Remembering that you own real companies with real cash flows and real earnings can help you stay invested when market turbulence is present. Of course, if you own a fake company with no cash flow and losses, that’s another issue altogether. We believe it is prudent to stick to mutual funds that own boring companies that produce real profits. The “stock market” is a “game” we don’t play!
Doug Lagerstrom