Thursday, 15 January 2015

Can price changes in common stocks be ignored?

Can price changes in common stocks be ignored?

Does the investor become richer or poorer as his stocks advance and decline in the market?

1.  NO

The bona fide investor who bought for income plus an incidental long-term increase in value, was supposed to be immune to the stock ticker and the market reports.

The nature of investment-grade common stocks before the First World War was their dividends were well maintained even in depression years and their prices did not soar to absurd heights in bull markets and consequently they did not fall into the abyss even in panic times.

Thus, it was possible for the "permanent holder" of these stocks to ignore their price fluctuations as irrelevant to his own purposes and philosophy.

2.  YES

Nowadays the situation is different.  No one believes seriously that the common-stock investor can remain indifferent to price fluctuations.

The reason for this about-face is found in a change in the stock market itself.  Before the First World War common stocks could be divided into a small number of investment issues and a much larger number of speculative issues.

The price movements of the investment issues were relatively narrow, even when the market as a whole was fluctuating widely.  Thus the holder of these quality stocks was under no real psychological pressure to pay attention to the market.

Beginning with the bull market of the 1920's this condition has changed.  Because the high-grade issues have risen to excessive heights in period sof speculative enthusiasm, they have tended to swing far downward in the ensuing bear markets.

Confronted with price variations of the kind experienced since 1929, it is impossible for the modern investor to ignore these phenomena.  Clearly the success of his investment program in common stocks must depend in great part on what happens ultimately to their prices.


But how far must he commit himself to concern with the market's conduct?

By what market tests should he consider that he has been successful or not?

Certainly not by short-term or minor fluctuations, for this attitude would make him indistinguishable from the stock trader.

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