TEMPORARY INSANITY IN INVESTMENTS?
Last October 3, Apple reached its maximum price, 233.47 USD, valuing the company at 1.121 trillion dollars.
Exactly 3 months later, it had lost 40% of that value, each share amounted to 142 dollars. The S&P 500, the world’s biggest stock index, fell about 20 percent.
In December, many companies varied on the same day more than 10% between highs and lows, reminding us that sometimes a kind of temporary insanity takes over the market.
In the book “The General Theory of Employment, Interest and Money,” Keynes highlights the emotions that influence our behaviors and decisions:
“In addition to instability due to speculation, there is instability due to the characteristic of human nature which dictates that a large proportion of our activities depend on spontaneous impulses rather than on mathematical or economic expectations.
Probably most of our decisions can only be regarded as the result of animal spirits, that is, a spontaneous tendency to action rather than inaction, and not as the result of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
The ease with which one buys and sells, without knowledge or conviction, a short-term industry, too many consultants and “helpers,” and the media sprinkling gasoline, are huge obstacles for investors to stick to a coherent wealth creation strategy.
Benjamin Graham explains in “The Intelligent Investor,” the best book ever written on investment, this pendulum between fear and greed that hangs over the financial market:
“Imagine that you hold, in a private company, a quota for which you paid $1000. One of your associates, Mr. Mercado, is very helpful.
Every day he tells him what he thinks his participation in the company is worth and he offers to buy it or to sell him an additional quota in the same company.
Sometimes the value of Mr. Mercado seems plausible and justified by the developments and prospects of the business.
Often, however, Mr. Mercado is carried away by enthusiasm or fear, and the value he proposes to him is nothing short of ridiculous.
If the reader is a prudent investor or a sensible businessman, will he let Mr. Mercado’s daily communication determine his perception of the value of a $1000 quota in the company?
Only when you agree with him or when you want to negotiate. The reader can be satisfied by selling his quota for a ridiculously high price and equally satisfied when buying an additional quota when the price is low.
The rest of the time, however, the smartest thing to do is to form your own idea of the value of your quota based on the company reports on your activities and financial position.
The true investor is in this same position when he holds shares of listed companies in the portfolio.
You can take advantage of the daily market price or leave it alone. Basically, price fluctuations have only one important meaning.
They give the investor the opportunity to buy when prices fall and to sell when prices rise.
The rest of the time, the investor will do better to forget the market and pay attention to the dividends and operating results of their companies.”
