It is important to remember an obvious – but easily overlooked – truth: the stock market is a market. First and foremost, the stock market is not a bank. It is not a place to put your money for safe keeping, nor is it a place to pay a predictable price for a desired product. It is a place to buy securities that you think will appreciate in price or provide future income and to sell securities that you think will go down in price. Those prices, in turn, are dictated by how much other people want to buy or sell the things you want to sell or buy.
If the company is profitable, the company's stock should continue to have monetary value. If the company becomes more profitable, the value of the shares should go up; if the company becomes less profitable the shares should go down. I use the word ’should’ because market prices are driven by people, and people are not always rational. Sometimes a security that you own may disappoint investors, resulting in a price drop. Prices represent market conditions, not necessarily the quality of the underlying holding. If a holding was a smart investment before the price drop, it will probably still be a smart investment after the drop. Conversely, a stock or fund is not ‘better’ just because the share price goes up. The market conditions were such that a lot of people wanted to buy that stock or fund. For example, if lots of investors want to buy Apple* stock on a particular day, shares will go up in price. Conversely, if lots of investors want to sell Apple stock on another day, the price will go down. That does not necessarily reflect that Apple became a better or worse company, just that investor sentiment went one way or another. A share of stock still represents ownership of a profitable company, whether investors happen to like it more or less this week or month or quarter. When navigating a marketplace in which price changes often do not correlate with underlying business quality (or industry, sector, country), it is important to remember why a particular holding is worth owning and how long you believe it will remain so. If you believe a company is an important player in a growing industry over the next decade, one bad quarter or year is not really that significant. If the thing you bought continues to be a good thing, it is worth owning. If it stops being a good thing, it is time to sell. I encourage any investor to keep a record or journal of all purchases, including quantity, cost per share, thesis (the reason for buying), and holding period. Similarly, one should record all sales, including quantity, price per share, and reason for selling. This will help you remain resilient when prices drop (and thus avoid selling a good investment too soon) or recognize when your original thesis is no longer true (and avoid holding an investment longer than necessary). Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
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* Timothy Iseler owns shares of Apple Inc. This article is not intended as an endorsement of Apple Inc or a recommendation to buy or sell Apple stock.