Value Investing – Market Fluctuations (Lesson 3)
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
The prima facie tenet of value investing is to buy low and sell high. In order for this to happen, the respective targeted stocks, those within the pools created, must have price changes. In business, well run companies have a continuously increasing stock price driven by ever increasing profits. As profits rise, so does the stock price. One of the best examples is Coca-Cola. Look at Coke’s stock price for last 58 years.
Coca-Cola is considered one of the best performing companies over its lifetime. If you had purchased $50 worth of stock in 1919; it would be worth over $20 Million today.
Coca-Cola is one of the DOW Jones Industrial Average companies (top 30) today and has been for almost 40 years. Thus, it is expected for it to earn good profits and be a sound well run organization; review Lesson 2.
This particular trend line of Coke’s stock price mirrors the DOW Jones Industrial Average over a similar timeline. And you’ll discover that the large capitalization market companies combined have a similar line also. Thus, in general, quality stocks continue in an upward trend.
If this is true, how can a value investor make money? Go back to the prima facie tenet of business: ‘Buy Low, Sell High’. The idea is to create a pool of similar stocks, about 4 to 8 stocks of companies with similar characteristics and financial dominion. Do some research, analysis and create financial metrics. This provides the value investor the confidence to set the buy and sell prices for each company within the pool.
Now it is just a matter of waiting for the fluctuations to occur. How do they occur though?
Every company, industry, sector and the economy as a whole experience fluctuations with
© 2020 – 2022, David J Hoare MSA. All rights reserved.