Businessman Investor

Touching base with the rational business psyche of stock market investors

Sunday, August 7, 2011

Stock Market Noise and the Distortion of the Essence of Businesses

New York Stock Exchange floor traders. Pictures of adrenaline-driven traders shouting and pushing each other are a common stereotype of the stock market, definitely one of the popular culprits of Wall Street's infamous image.
The wealth-generating faculty of a stock does not naturally derive itself, as notoriously perceived by many, from the prospect of capital gains by trading. A capital gain is caused by stock market price fluctuations and is not an inherent feature of any business—this is but a result of the perceptions of market participants or the investing public which may or may not be aligned to the real value of the underlying business—it can be driven by folly, speculation, even manipulation. Even more surprising, when a company is listed in an exchange, most seems to think that the prospect of profits immediately become dependent on its stock price movements. It seems to have ceased functioning as a true business and that it magically possesses some other financial attribute which makes it more sophisticated, riskier, or sexier to the eyes. The essence of a business internally-generating profits through its operation, is easily overlooked or consciously dismissed.

The conventional wisdom in stock market investing is buying low and selling high. The problem with this mantra is that it subliminally communicates the idea that stock ownership is a temporary position which one may easily dispose off whenever the opportunity of selling at a higher price presents itself. The intention of quick, short-term capital gains, however, can only go so far. For one, a trader or investor should be able to do this consistently—a rare and hard skill to master; the moment one sells, he is immediately subjected to the burden of finding another opportunity to exploit. In addition, this activity has a lot of transaction cost exposure to it especially when done frequently. The strategy simply does not capitalize on the full potential of what a business is originally meant for.

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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