As you can see from both of the scenarios, investing can be a tricky. It is important to remember that share prices are only moved when investors buy and sell them. Investors look at a number of factors when they consider making a trade. Some of the more common factors include revenues (sales), profits, EPS, PEs, and growth factors. But a very real part of investing is having your own opinions about which company will be successful.
Successful investors should only be concerned with trying to answer one question:
WHICH COMPANY'S SHARE PRICE HAS THE BEST VALUE IN TERMS OF ITS FUTURE GROWTH POTENTIAL?
But instead, investors sometimes get caught up trying to answer,
HOW CAN I PREDICT WHAT OTHER INVESTORS WILL DO SO THAT I CAN BE ONE STEP AHEAD OF THEM?
But it's hard to blame them for this thinking. Think of it this way. If you were the best investor in the world and you purchased a wonderful company with great earnings and a low PE but no one else invested in it, what would happen? That's right, the share price would never move.
After playing the scenarios it should be obvious that investors' decisions are what moves share prices. The real trick for successful investors is to not get caught up in what other investors are doing and select stocks according to their fundamentals and on a long-term basis.
Trying to "time the market" by buying and selling shares quickly as prices go up and down can be extremely risky and is at odds with the successful philosophy of looking toward the long term. Find companies you believe are sound. The share price may have its ups and downs, but as long as the business continues to be successful, so will you.
It is important to know that both XYZipper and ABC Pizza (the companies in our scenarios) will both come back to more reasonable levels over the long term (as long as the fundamentals of the business remain strong). This is why patience is such an important characteristic for successful investors. Yet, you probably see how hard it is to be patient as you made your choices in the scenarios.
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