On June 23, citizens of the United Kingdom voted in support of leaving the European Union. Before the Brexit vote was official, the DJIA closed at 18,011.
After the results came in, the DJIA plunged 900 points over the next two trading sessions — falling along with global markets.
And then, in an about-face, markets stopped falling and started to soar.
So just one week later, on June 30, the DJIA closed at 17,929. If you were on vacation for the past week and had no idea what the markets were doing, you wouldn’t have noticed much change when you came back.
What you might not realize is that these types of market gyrations are nothing new. Global markets find a reason to sell off almost every year or so.
Last summer it was the devaluation of China’s yuan, and before that it was Greece’s debt crisis — there’s always something that strikes fear into the heart of the investment herd.
And each time something pops us, it looks like the end of capitalism.
I’ll give you my advice: ignore it!
As an intelligent investor, it’s best to block out the noise and focus on the business in which you’re investing.
And believe me, good things will happen when you stick to buying financially sound companies.
Take Advantage of Mr. Market
Ben Graham, Warren Buffett’s mentor, teacher, and friend, explained Mr. Market by way of a parable. He said an investor should imagine that in a private business of which he owns a small share, he has a partner named Mr. Market.
And every day, Mr. Market tells you what he thinks your interests are worth and offers to either buy or sell your interest for that price.
On the good days, Mr. Market is spot on, and his price is justified by the underlying worth of the business.
On those other days, however, Mr. Market lets his emotions get the better of him. When euphoric, he offers you sky-high prices for your interests. But when depressed, he offers you very low prices for those same interests.
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The point is that Mr. Market doesn’t care if you sell to him when he offers you a very high price or buy from him when he offers you a very low price.
So, you can see why it’s always more profitable to form your own ideas on the value of your interest based on its underlying worth, rather than letting the market determine those values for you.
Simply put, the market is there to serve you — not to guide you!
Let me put it another way…
Imagine you own a private business that is worth $1 billion, and your most recent quarterly earnings were $50 million, which turned out to be $1 million lower than the previous quarter (I’m assuming there was a perfectly good explanation for the decrease in earnings).
Now imagine getting a call from a business broker offering to buy your business for $700 million, yet it was valued yesterday at $1 billion.
How fast would you hang up the phone?
You can understand why it seems absurd that someone would have the nerve to make an offer that is so disconnected from the value of the business.
But that is exactly what happens in the stock market every day!
Like I said, many investors are simply unable to grasp the relationship between the value of a business and the price of a stock.
And that, dear reader, is where we gain the advantage…
Just think of the same situation I just outlined regarding the $1 billion private business. How fast would you buy shares from a minority partner that offered shares based on their “emotion” valuation of $700 million?
And if you think this doesn’t happen on Wall Street, think again.
All my best,
Charles Mizrahi
Twitter: @IWPeditor
Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.
And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters.
Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
