With all of the headlines and volatility in the markets these days, perhaps we should take a step back and talk about some basics. First of all, what propels stocks up and down? Quite simply, stock prices change when either the buyers feel the stock is worth more than what it is selling for and are willing to pay more for a share, or when sellers feel as though the stock is worth less than what it is selling for and are willing to accept less. It is the age-old game of supply and demand, which is further fueled by investors’ greed or fear. Secondly, what is one of the driving forces behind investor decisions? Conventional Wisdom. Conventional wisdom is a term used to describe certain ideas or explanations that are generally accepted as true by the public.
As this term is rarely used in a positive light, one can imagine how an investor who follows conventional wisdom when making investment decisions may frequently find themselves on the wrong side of a market move. Those who make money in the stock market are often able to determine how much of the conventional wisdom is based on knowledge, and how much is based on fluff.
Take, for example, the Internet industry: In the late 1990s, investors were told to ignore profits, ignore stratospherically high P/E ratios, and ignore tried and true measures of value. Instead, investors were told of the “new economy” and that stocks could not be valued using the dusty old methods that did not take into account how much the Internet was “changing the world!” Investors remember all too well what happened; many of the stocks performed poorly, while others simply went out of business. The markets proved that profits were still important, having a solid business plan still mattered, and poorly conceived businesses, even in a vibrant and growing industry, could still go bankrupt.
With respect to the stock market, it seems as though conventional wisdom is grabbing headlines again. The list of reasons stocks are doomed this time around is lengthy: feared tax law change, the price of oil, further concerns over credit issues, the war in Iraq, and the real estate market—to name a few. With all of this bad news out there, how could stocks ever rise again?
To answer this question, one only need remember what the market did shortly after the tech “bubble” burst. As early as spring 2003, the stock market began to turn around and made its next run until the summer of 2007. Then in the autumn of 2008 through early 2009, the market found itself yet again in another trying situation with investors asking, “what is next for the stock market?” What ever the current market state, on the short run, we simply do not know. During a bull market, bad news is often discarded and good news is the focus. During a bear market, good news is often ignored as the market focuses on bad news and the fear of more to come. This is where conventional wisdom often misses the mark and leads investors down a dead-end road.
There simply are no guarantees in stock investing. However, the U.S. stock market has increased in value over the last 100 years for the same reasons that it is likely to increase over the next 100 years. Technology has provided many businesses and employees with productivity increases. The United States remains the strongest country in the world, while continuing to deal with those who wish to harm us and disrupt our way of life. Consumers all over the world continue to demand products and services that make their lives better. Companies continue to look for profitable ways to provide these products and services. None of this has changed—not when the price of oil spikes to record highs, not when the U.S. real estate market is in a correction, and not even when the United States is at war.
Sometimes it makes sense to put conventional wisdom on the back burner when making investment decisions. For more information about Henssler Financial’s services or investment philosophy, please call 770-429-9166 or e-mail [email protected].