Don't Put The Chart Before The Investing Horse

Monday, Nov 12 2012 by

"If a business does well, the stock eventually follows" is another one of those often trotted out quotes from Warren Buffett which seems almost too obvious to take any note of. But in the world of investing we often see common sense take a back seat to more primitive responses such as fear and greed, and when the price of a share is dancing around seductively before our eyes for several hours each working day it is all too easy to lose sight of what really matters, namely business progress. Focusing on the price chart instead of the business is putting the cart before the horse.

When deciding upon a share purchase I generally proceed on the assumption that I will hold the share forever, or certainly for a very long period of time. That doesn’t necessarily mean I will never sell the share under certain circumstances, but the mindset it creates forms the basis for proper due diligence. The prospect of having a reasonable proportion of your net worth invested in a share for many years certainly justifies the few hours’ research I believe is important for successful investing. Sadly, I often get the impression that some investors spend more time monitoring share price movements than they do selecting their shares in the first place, just waiting for the stock market to make them some money. No, investors should not try to make money from the stock market, they should try to make money from the businesses in which they invest.

When price matters the most

Fundamentally, there are two primary objectives that need to be achieved for successful investing:

(1) finding good businesses which have the ability to create shareholder value over the long term; and
(2) purchasing those businesses at a fair or bargain price.

Both of those objectives need to be satisfied, and only one by itself will not do. There will always be plenty of fantastic businesses to find, yet some of them will not make fantastic investments if they are not acquired at the right price. The time when price matters the most is at the point of acquisition and this is where investors should concentrate their efforts. Conversely, some businesses can be acquired at what appears to be a bargain price but if their economics or management are such that shareholder value isn’t created then such bargains will prove to be illusory under…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

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1 Comment on this Article show/hide all

Davex 13th Nov '12 1 of 1

An exellent article with some sound advice for a beginner like me.

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