In the first section we saw how market factors influence investors' decisions. However, it is important to remember that market factors like PE, sales, profits, and growth rates don't change share prices - PEOPLE DO!
The philosophy of 'buying low and selling high' is a familiar one to investors. In theory it means we should purchase companies that have share prices that are not fully valued and, sell them when they have reached their peak (ex: maybe sales are slowing). Sounds like a good plan, right?
In reality, this is slightly more difficult. Since investors all have access to the same information, and since share prices reflect the future of a company, changes in share prices are actually caused by changes in investors' perceptions.
"So...what's the difference?", you might ask.
Lots. 'Buying low and selling high' now means purchasing shares when you feel everyone else (wrongly) believes the stock is a loser (or overpriced) and selling it when everyone else couldn't be happier with it - before they start selling their shares. Investing becomes much more concerned with out-smarting your neighbor or keeping one step ahead of everyone else; it is not necessarily concerned with selecting a company with a strong fundamentals and/or growth potential.
"Aw come on" you say, "I wouldn't get caught up in that attitude". Well, see if you can put your money (or...your investing philosophy) where your mouth is.
Play along with either of the two scenarios. You will see that market factors (sales, profits, and growth potential) and investors' perceptions (share price) do not always walk hand in hand. How you deal with this situation will say much about the type of investor you'll be.
Put your ideas to the test.
Continue to the scenarios. They only take a few minutes!
Skip the scenarios and continue to Prices Move: A Summary