As such, a stock price decline must imply the outlook is deteriorating, and vice versa. But stock prices move for all sorts of reasons, and many of them are unrelated to business fundamentals. And humans are emotional, they often over-react; psychological biases mean they often do the wrong thing at the wrong time. Consequently, stock prices can have little semblance to what a company is worth, be it too high or too low. Basically, stock prices are frequently irrational.
This is the beauty and the real opportunity in public markets. These markets are brimming with emotional participants who don’t know what they own, what their stocks are worth and who buy and sell at the wrong times. Emotions rather that facts drive their investment decisions. Sometimes it’s not even people, but two algorithms programmed to sell at market prices, come what may. No price is the wrong price for an algorithm.
In contrast, private market transactions are ordinarily set by astute, informed, rational sellers.
“In a negotiated purchase of a business, you’re almost always dealing with someone that has the option of either selling or not selling, and can sort of pick the time when they decide to sell, and all of that sort of thing. In stock markets, it’s an auction market. Crazy things can happen. You can have, you know, some technological blip that will cause a flash crash or something. And the world really hasn’t changed at all, but all kinds of selling mechanisms are tripped off, and that sort of thing. So you will see opportunities in the stock market that you’ll never really get in the business market.” Warren Buffett
“We don’t consider ourselves richer or poorer based on what the stock does. We do feel richer or poorer based on what the business does. So we look at the business as to how much we’re worth. And we do not look at the stock price, because the stock price doesn’t mean a thing to us.” Warren Buffett
And identifying good businesses that can grow their earnings is key.
Not overpaying is important. Although, paying too much for a great business is more likely to lead to waiting longer for results rather than the permanent loss of capital.
“We figure if we’re right about the business, we’re going to make a lot of money. And if we’re wrong about the business, we don’t have any hopes — we don’t expect to make money.” Warren Buffett
It also means not having to worry about the macro or political issues.
“Forget the noise. Investing is about owning businesses!” Francois Rochon
“Stock certificates are deeds of ownership in business enterprises and not betting slips.” J Paul Getty