Anybody can buy or sell shares and if that's the case it is not the most accurate method of assessing value that matters but the most popular.
And the most popular method is - regrettably, or should that be thankfully - dealing in shares without employing any valuation method of all.
February 6, 2010
Archie had his birthday this week. Seven. He is a wonderful kid having inherited all the best bits of his Mum and Dad with his everlasting smile, impartial consideration for others, dazzling good looks, the ability to talk the hind leg off a donkey, and his obsession with money - only one of which he got from me.
He is also a dedicated inquisitor, incessantly bombarding us with questions such as "Dad, what goes faster, a big jet or a small jet", "Dad, if you ditch the ants, are there more animals or humans in the world", "Dad, what would you prefer, to be sat on by an elephant, or poked in the eye by a baboon", "Dad, how many people are fishing in the world right now" and "Dad, how much money do you have in the bank".
We used to argue the relevance of the questions or the connection between the alternatives he presented but after four years of barrage we have now just learnt to answer "Animals","Big jets", "Sat on by an elephant" or "64,675,432", which unfortunately is not the amount of money I have in the bank.
So you can imagine the attack when Archie saw his first share price chart.
- "What's a chart",
- "What's a share price",
- "Why does it go up and down",
- "Why don't you know what the price is?",
- "If it was a scooter it would always be $99.95".
- And why indeed don't we know what the share price is?
- That would be nice, if someone could simply tell us.
As rumour would have it, the most popular method of telling you what a share price should be is some form of Buffettology. Its reach is universal. There is hardly a man on the street who would not profess some ability and intention to invest on the sensible and highly publicised principles of value assessment and patience that "the Warren Buffett Way" supports. But allow me to let you in on a sharemarket secret.
- Anybody can buy or sell shares and if that's the case it is not the most accurate method of assessing value that matters but the most popular.
- And the most popular method is - regrettably, or should that be thankfully - dealing in shares without employing any valuation method of all.
Scary, but that's how shares prices move most of the time, without anyone doing any assessment of value.
- How else could the share price of the Commonwealth Bank more than halve from $62 to $24 in the global financial crisis and then more than double to $58 last month if the biggest driver of the share price was the rational assessment of the company's value.
- There is no way the bank's value fell 60 per cent and then rose 140 per cent, and it didn't, but the value of the shares did and this mismatch reveals the plain truth about shares.
There are two very different things going on in the market and every time you put on an order you have to choose to exploit one or the other with nothing in the middle.
- Either you are trading in shares and hoping the price will go up, or
- you are investing in companies and waiting for the value to surface.
Both are OK, both have intellectual pull, neither has the moral high ground (although many think they have) and you can do both at the same time. But as a buyer and seller of shares you do need to ask yourself every time an order goes on the screen "Just what am I doing?" because perhaps one of the most prevalent and enduring mistakes among clients and advisors alike is the use of the language of rational value investment as the pretence for disorderly trade. It is everywhere.
So what are you going to do?
Because I can guarantee that until you stop kidding yourself that
- you are investing in companies
- when you are in fact trading share prices
- either devote yourself to a value approach
- or learn to trade with discipline
- things will not improve and
- you will continue to be sat on by elephants and poked in the eye by baboons.
Marcus Padley is a stockbroker with Patersons Securities and the author of the daily stockmarket newsletter Marcus Today.
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