Stay in Touch with the Market: Opportunities and Dangers

Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today. This is because the financial markets are prolific creators of investment opportunities. 

• Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets. 
• Today with so many market participants having little or no fundamental knowledge of the businesses their investments represent, opportunities to buy and sell seem to present themselves at a rapid pace. 
• Given the geopolitical and macroeconomic uncertainties we face in the early 1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings? 

Being in touch with the market does pose dangers, however.

• Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short-term-oriented trading. 
• There is a tendency to be swayed by recent market action, going with the herd rather than against it. 
• Investors unable to resist such impulses should probably not stay in close touch with the market; they would be well advised to turn their investable assets over to a financial professionaL 

Another hazard of proximity to the market is exposure to stockbrokers.

• Brokers can be a source of market information, trading ideas, and even useful investment research. 
• Many, however, are in business primarily for the next trade. 
• Investors may choose to listen to the advice of brokers but should certainly confirm everything that they say. 
• Never base a portfolio decision solely on a broker's advice, and always feel free to say no.

The Relevance of Temporary Price Fluctuations (unrelated to Underlying Value)

Permanent loss versus Interim Price Fluctuations

In addition to the probability of permanent loss attached to an investment, there is also the possibility of interim price fluctuations that are unrelated to underlying value. (Beta fails to distinguish between the two.)

Many investors consider price fluctuations to be a significant risk: if the price goes down, the investment is seen as risky regardless of the fundamentals.



But are temporary price fluctuations really a risk? 

Not in the way that permanent value impairments are and then only for certain investors in specific situations. 

It is, of course, not always easy for investors to distinguish temporary price volatility, related to the short-term forces of supply and demand, from price movements related to business fundamentals. The reality may only become apparent after the fact.

While investors should obviously try to avoid overpaying for investments or buying into businesses that subsequently decline in value due to deteriorating results, it is not possible to avoid random short-term market volatility. 

Indeed, investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate some volatility. 




If you are buying sound value at a discount, do short-term price fluctuations matter? 

In the long run they do not matter much; value will ultimately be reflected in the price of a security.

Indeed, ironically, the long-term investment implication of price fluctuations is in the opposite direction from the near-term market impact. 

For example, short-term price declines actually enhance the returns of long-term investors.' 



Near-term price fluctuations matter to certain investors

There are, however, several eventualities in which near-term price fluctuations do matter to investors.

1.   Security holders who need to sell in a hurry are at the mercy of market prices.

• The trick of successful investors is to sell when they want to, not when they have to.
• Investors who may need to sell should not own marketable securities other than U.S. Treasury bills.

2.   Near-term security prices also matter to investors in a troubled company. 

• If a business must raise additional capital in the near term to survive, investors in its securities may have their fate determined, at least in part, by the prevailing market price of the company's stock and bonds. (This effect, known as reflexivity.)

3.  Volatility is the friend of the long term value investor.

• The third reason long-term-oriented investors are interested in short-term price fluctuations is that Mr. Market can create very attractive opportunities to buy and sell. 

Risk and Return: Risk does not create incremental return, only Price can

While most other investors are preoccupied with how much money they can make and not at all with how much they may lose, value investors focus on risk as well as return.




Most investors seem confused about risk.

Some insist that risk and return are ALWAYS positively correlated, the greater the risk, the greater the return.  This is in fact, a basic tenet of the capital-asset-pricing model taught in nearly all business schools, yet it is not always true.

Others mistakenly equate risk with volatility, emphasizing the "risk" of security price fluctuations while ignoring the risk of making overpriced, ill-conceived, or poorly managed investments.

A positive correlation between risk and return would hold consistently only in an efficient market.

• Any disparities would be immediately corrected; this is what would make the market efficient.  

In inefficient markets it is possible to find investments offering high returns with low risk.  These arise

• when information is not widely available, 
• when an investment is particularly complicated to analyze, or 
• when investors buy and sell for reasons unrelated to value.  

It is also common place to discover high risk investments offering low returns.  

• Overpriced and therefore risky investments are often available because the financial markets are biased toward overvaluation and because it is difficult for market forces to correct an overvalued condition if enough speculators persist in overpaying.  
• Also, unscrupulous operators will always make overpriced investments available to anyone willing to buy; they are not legally required to sell at a fair price.

Risk and return must be assessed independently for every investment.

Since the financial markets are inefficient a good deal of the time, investors cannot simply select a level of risk and be confident that it will be reflected in the accompanying returns.  

Risk and return must instead be assessed independently for every investment.

In point of fact, greater risk does not guarantee greater return.

• To the contrary, risk erodes return by causing losses.  
• It is only when investor shun high-risk investments, thereby depressing their prices, that an incremental return can be earned which more than fully compensates for the risk incurred.  

By itself risk does not create incremental return, only price can accomplish that.  

What is investing? My core.

Investing is all about buying a flow of earnings at an acceptable price.

The pace of earnings growth is a second-order issue.

Risk is the possible loss of long-term purchasing power.

Volatility of price is not risk.  It is the ally of the long-term investor.

The market is NOT ALWAYS efficient.  In general it is efficient, but NOT ALWAYS, and this small difference is crucial, enabling us to capitalise on it.

Warren Buffett: Volatility in the Market

Market Volatility

What should you do?

If you own a farm or an apartment, you do not get a quote on them every day or every week.

The value of a business depends on how much in terms of cash it delivers to its owners between now and judgment day and I don't think it changes in 10% in a 2 months period if you are looking at it as a business.

Anything, I mean, anything can happen in the market; that is why don't borrow money against any securities.  Markets don't have to open tomorrow.  You can have extraordinary events.


You can get some of the instruments that people don't understand very well that has a lot of fire-power.

Volatility of Single Stocks

Volatility of Single Stocks

Individual stocks tend to have highly volatile prices.

The returns you might receive on any single stock may vary wildly.



Best Performing Stocks

If you invest in the right stock, you could make bundles of money.

• For instance, Eaton Vance, an investment-management company, has had the best-performing stock for almost 25 years.  If you had invested $10,000 in 1979 in Eaton Vance, assuming you had reinvested all dividends, your investment would have been worth $10.6 million by December 2004.

Worst Performing Stocks

On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment.

• There are hundreds of dot-com investments that went bankrupt or are trading for a fraction of their former highs in early 2000.

• Even established, well-known companies such as Enron, WorldCom and Kmart filed for bankruptcy and investors in these companies lost everything.

All Stocks in Between these two Extremes

Between these two extremes is the daily, weekly, monthly and yearly fluctuation of any given company's stock price.

• Most stocks won't double in the coming year, nor will many go to zero.

• But the average difference between the yearly high and low stock prices of the typical stock on the NYSE is nearly 40%.

Stocks that don't perform over Long Time

In addition to being volatile, there is the risk that a single company's stock price may not increase significantly over time. 

• In 1965, you could have purchased General Motors' stock for $50 per share (split adjusted).  By May 2005 (4 decades later), your shares of General Motors would be worth only about $30 each.  Though dividends would have provided some ease to the pain, General Motors' return has been terrible.  
• You would have been better off if you had invested your money in a bank savings account instead of General Motors' stock.

All your Eggs in a Single Basket

Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs.

Other times, that basket will hold the equivalent of a winning lottery ticket.

Focus investor and Risk

In contrast to the diversified stockholder, the focus investor will ordinarily demand a significant margin of comfort prior to allocating substantial funds to a single stock. Fear of loss can concentrate the mind wonderfully, and the investor staking a large proportion of his or her total funds on only one security is more likely to rigorously scrutinize this potential investment.

As Buffett summarizes, a policy of portfolio concentration should serve to increase “both the intensity with which an investor thinks about a business and the comfort-level he must feel
with its economic characteristics before buying into it.”

Focusing on only a handful of stocks should not, therefore, increase portfolio “ risk,” at least as it is defined by the layperson—that is, the possibility of incurring financial loss.

• The intelligent investor will only select those stocks that exhibit the largest shortfall between quoted price and perceived underlying value—that is, those securities that are likely to provide the greatest margin of safety against financial loss in the long term. 
• Although a compact suite of stocks will be undeniably more volatile than a diversified holding, short-term price fluctuations are of little concern to a long-term holder of stocks who focuses on income rather than capital appreciation.
• Indeed, value investors favor those stocks that display the potential for extreme volatility— the difference is that these investors expect predominantly upside volatility.

Risk, for value investors, is not a four-letter word—it is embraced and addressed proactively, not defensively

Investing has a whole new set of rules.

If we are to be successful, we need to play by these new rules.

Why the average equity fund investor underperforms the market?

From 1993 to 2012, the S&P Index 500 averaged a gain of 8.21% per year.

However, during that same 20 year period, the average equity fund investor had an average annual gain of only 4.25%.  

Had the average equity fund investor just bought a low-cost S&P 500 Index fund and held it, he/she would have almost doubled their rate of return.

The underperformance was due to investor behaviour such as market timing and chasing hot funds.

Had these investors been long-term, buy-and-hold investors, they would have earned close to the market's returns.

When the average investor underperforms the index by such a significant amount, it is clear that most are playing with a bad set of guidelines or none at all.

A one-time investment of $10,000 invested at 8% compounds to $46,610 in 20 years.

The same $10,000 invested over the same period at 4.25% compounds to only $22,989.

Short-run performance of the stock market is random, unpredictable and very volatile

The short-run performance of the stock market is random, unpredictable and for most people, nerve-racking.

The next time you hear someone saying that he/she knows how the stock market or any given stock is going to perform in the next few weeks, months, or years, you can be sure they are either lying or self-delusional.

The long-term trend of the stock market is up and its performance consistent

There is more than 200 years of U.S. stock market history and the long-term trend is up.  

Over the long term, stock market performance has been rather consistent.

During any 50-year period, it provided an average after-inflation return of between 5 and 7 percent per year.

If you invested in a well-diversified basket of stocks and left them alone, the purchasing power of your investment would have doubled roughly every 12 years.

Stocks over the long-run offer the greatest potentials return of any investment

Although long-term returns are fairly consistent, short-term returns are much volatile.  

Stocks over the long-run offer the greatest potential return of any investment, but the short-run roller-coaster rides can be a nightmare for those who don't understand the market and lack a sound investment plan to cope with it.  

The 1990s were stellar years for stocks but the 1930s were a disaster.

The Disadvantages of Stock Ownership

There are some disadvantages of common stock ownership.

1.  Risk

Risk is perhaps the most significant.

Stocks are subject to various types of risk, including:

• business and financial risk,
• purchasing power risk,
• market risk and 
• event risk.

All of these can adversely affect 

• a stock's earnings and dividends, 
• its price appreciation and 
• of course, the rate of return that you earn.

Even the best of stocks possess elements of risk that are difficult to eliminate because company earnings are subject to many factors, including:

• government control and regulation,
• foreign competition and
• the state of the economy.

Because such factors affect sales and profits, they also affect stock prices and (to a lesser degree) dividend payments.

2. Price & Returns Volatility

All of this leads to another disadvantage: stock returns are highly volatile and very hard to predict, so it is difficult to consistently select top performers.

The stock selection process is complex because so many elements affect how a company will perform.

In addition, the price of a company's stock today reflects investors' expectations about how the company will perform.

In other words, identifying a stock that will earn high returns requires that you not only identify a company that will exhibit strong future financial performance (in terms of sales and earnings) but also that you can spot that opportunity before other investors do and bid up the stock price.

3. Current income

A final disadvantage is that stocks generally distribute less current income than some other investments.

Several types of investments - bond, for instance - pay more current income and do so with much greater certainty.

Comparing the dividend yield on common stocks with the coupon yield on high grade corporate bonds from 1976 to 2012,  shows the degree of sacrifice common stock investors make in terms of current income.

Clearly, even though the yield gap has narrowed a great deal in the past few years, common stocks still have a long way to go before they catch up with the current income levels available from bonds an most other types of fixed-income securities.

Message:  

In other words, identifying a stock that will earn high returns requires that:

• you not only identify a company that will exhibit strong future financial performance (in terms of sales and earnings) 
• but also that you can spot that opportunity before other investors do and bid up the stock price.

The biggest risk of all.

Volatility is often equated to risk and many investors are concerned over this uncertain value of investments in the short term.

There are other kinds of risk too.


1.  Capital risk.
2.  Liquidity risk
3.  Currency risk
4.  Interest rate risk
5.  Financial risk
6.  Credit risk
7.  Event risk (Black Swan)

However, the biggest risk of all is when you elect not to invest or participate in the market.

You are assuring yourself of a declining standard of living because inflation will eat away the value of your holdings over time.

It is impossible to avoid risk in investing or in life.

Risk can be managed, through asset allocation and diversification, within and among asset classes and managing risk is crucial to investment success.

Time is your friend. Time smooths out volatility.

Historically, time smooths out volatility.

The longer you stay in the market, the more likely you are to see your investment do what it should.

The range of returns narrows when we hold our investments for a longer period of time.

Even the most volatile asset class, that is, stocks, becomes relatively stable when you take the long view.

If you have a reasonable time horizon, you have an excellent chance of high average returns over many years.
That translates into a comfortable portfolio with plenty of cushioning along the way.

What if you are approaching retirement or you are already in retirement?

How can you get the returns you want while minimizing the volatility you don't want?

The answer:  diversify.

Petronas Dagangan

The stock price has risen from MR 2.00 in 2000 to MR 4.00 in 2005.

It has risen from MR 4.00 in 2005 to MR 8.00 in 2010.

From MR 8.00 in 2010, it has risen to MR 17.00 in 2015..

From 2000 to 2015, this stock has delivered multi-bagger returns.

Between 2000 to 2015, there were 3 big dips in the price of the stock, in 2001, 2009 and recent months.

Don't forget to add the GROWING dividends!

Latest February 2015  Special Dividend  0.22 

18 Nov 2014	0.12 Dividend
21 Aug 2014	0.14 Dividend
21 May 2014	0.12 Dividend
20 Feb 2014	0.175 Dividend
14 Nov 2013	0.175 Dividend
4 Sep 2013	0.175 Dividend
10 Jun 2013	0.175 Dividend
7 Mar 2013	0.175 Dividend
12 Dec 2012	0.175 Dividend
4 Sep 2012	0.175 Dividend
4 Jun 2012	0.175 Dividend
8 Mar 2012	0.15 Dividend
7 Dec 2011	0.15 Dividend
24 Aug 2011	0.15 Dividend
1 Aug 2011	0.35 Dividend
9 Dec 2010	0.30 Dividend
24 Feb 2005	2: 1 Stock Split
* Close price adjusted for dividends and splits.

3 Aug 2010	0.15 Dividend
7 Dec 2009	0.15 Dividend
5 Aug 2009	0.33 Dividend
10 Dec 2008	0.12 Dividend
1 Aug 2008	0.33 Dividend
14 Dec 2007	0.12 Dividend
12 Dec 2005	0.05 Dividend
17 Aug 2005	0.10 Dividend
30 Nov 2004	0.10 Dividend
5 Aug 2004	0.20 Dividend
10 Dec 2003	0.20 Dividend
23 Jul 2003	0.10 Dividend
22 Jul 2003	0.10 Dividend
* Close price adjusted for dividends and splits.

Comments:  5.2.2015

Revenue - Lower due to Decrease in Sales volume

Group Operating Profit  -  Lower due to lower gross margin and higher operating expenditure.

1.  Lower gross profit margin - Lower due to higher product cost due to unfavourable timing differences of the Mean of Platts Singapore ("MOPS" prices compared to corresponding quarter last year.

2.  Higher operating expenditure - mainly attributed to manpower expenses, ICT maintenance charges, advertising and promotion and net loss on foreign currency as US dollar weakened against Malaysian Ringgit during the current period compared to net gain on foreign currency during the corresponding period last year.

Increase in revenue - due to higher selling price 

Decrease in revenue - due to decrease in sales volume, despite a higher average selling price.


The downward trend in global oil prices has an adverse impact on PDB's margins.  

PDB's business is expected to be challenging as long as the downward trend is expected to continue.


How to defend its overall market leadership position?

1. Grow its business domestically - further strengthening its brand, sweating existing assets and continuosly enhancing customer relationship management.

2.  Continue its cost optimisation efforts - enhancement of supply and distribution efficienecy, improvement of terminal operational excellence to further improve cost of operations.



NOTE:  

Results of PDB will be affected adversely when:

1.  US currency is weakening.  

2.  The global oil price is trending downwards.    


Do you think the fundamentals of PDB are permanently damaged or they are facing a temporary period of difficulties or challenges?   


How can PDB delivers better results?

1.  Increasing its volume sold.
2.  Lower average selling prices may lead to increase in volume sold.
3.  Operational efficiency - cost and expense minimisation - leading to increasing profit margins.
4.  When US dollar is appreciating or getting stronger.
5.  When global oil price is stabilised or increasing in price trend.

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.

Price Changes of common stocks with highly stable earnings.

The stability of annual earnings per share of a selected common stock is extraordinary.  

Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.

In 16 out of 22 years, the earnings per share varied only between $1.93 and $2.32.  In the other 6, including the boom and deepest depression years, the range widened only to $1.38 - $2.88.

It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.

Hence the variation in market price must have been entirely psychological in their origin.  They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.

Under the circumstances, the range of price changes must be considered extraordinary.

It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49.   For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2.  In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.


Reference
The Intelligent Investor, by Benjamin Graham

Temporary Price Fluctuations is to be expected. It is not possible to avoid random short-term market volatility.

Relevance of Temporary Price Fluctuations 

In addition to the probability of permanent loss attached to an investment, there is also the possibility of interim price fluctuations that are unrelated to underlying value. 

Many investors consider price fluctuations to be a significant risk: if the price goes down, the investment is seen as risky regardless of the fundamentals.


But are temporary price fluctuations really a risk?  

-  Not in the way that permanent value impairments are and then only for certain investors in specific situations. 

-  It is, of course, not always easy for investors to distinguish temporary price volatility, related to the short-term forces of supply and demand, from price movements related to business fundamentals.

-  The reality may only become apparent after the fact. 

-  While investors should obviously try to avoid overpaying for investments or buying into businesses that subsequently decline in value due to deteriorating results, it is not possible to avoid random short-term market volatility.

-  Indeed, investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate some volatility. 



If you are buying sound value at a discount, do short-term price fluctuations matter? 

-  In the long run they do not matter much; value will ultimately be reflected in the price of a security.

-  Indeed, ironically, the long-term investment implication of price fluctuations is in the opposite direction from the near-term market impact. 

-  For example, short-term price declines actually enhance the returns of long-term investors.



There are,however, several eventualities in which near-term price fluctuations do matter to investors. 

1. Security holders who need to sell in a hurry are at the mercy of market prices. 

- The trick of successful investors is to sell when they want to, not when they have to.


2.  Near-term security prices also matter to investors in a troubled company. 

-  If a business must raise additional capital in the near term to survive, investors in its securities may have their fate determined, at least in part, by the prevailing market price of the company's stock and bonds.


3. The third reason long-term-oriented investors are interested in short-term price fluctuations is that Mr. Market can create very attractive opportunities to buy and sell. 

-  If you hold cash, you are able to take advantage of such opportunities. 

-  If you are fully invested when the market declines, your portfolio will likely drop in value, depriving you of the benefits arising from the opportunity to buy in at lower levels.

-  This creates an opportunity cost, the necessity to forego future opportunities that arise
.
-  If what you hold is illiquid or unmarketable, the opportunity cost increases further; the illiquidity precludes your switching to better bargains.



www.safalniveshak.com

Chuck Carlson - Stock Market and Investment Opportunities

Published on 29 Apr 2013

The power of process will be essential for unemotional investing in this age of turbulence. Investors will learn about profit opportunities in 2013 and the power of dividends.

Warren Buffett (1962) talks about a brief stock market drop

The market prices reflect the sentiment of the investors. To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.

It is the nature of the market that prices of a stock can be pushed to very low level when the crowd is pessimistic.  On the other hand, the prices of these same stock can be pushed to very high level when the crowd is optimistic.  The reasons maybe fundamental or sentimental.

The market prices reflect thus the sentiment of the investors.  However, the value of a stock is unlikely to change very much during these short periods when the market prices may change drastically.

To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.

More investors lose money when they overpay for the stocks when the crowd is overoptimistic.  Many hold onto losses in unbelievable denial.  This is evident whenever the price of a stock falls.  Why does the price of a stock fall?  Often these investors blame many external factors for the fall, when in fact, the single most important reason is themselves, they overpaid for the stock during period of over-optimism.

Is this rational?

"Would your car's value change so much?"
Market price volatility is the friend of a value investor.

Any price - and therefore P/E - movements that is not related to the company's earnings is transient.

The stock market is governed by a diverse set of influences.  And just as the sea is, it is predictable over the long term but not over the short term.

Probably the most widely watched reason for the long-term fluctuations of the price and P/E is the rise and fall of the stock market itself.  This can be a function of the economy's volatility.  The economy is battered by the rise and fall of interest rates, by inflation, and by a variety of factors that drive consumer confidence or buying power up or down.  Actual changes in the economy itself will cause longer-term changes in the market and the prices of its individual stocks.  Speculation about such changes has a shorter-term effect.

In the shorter term, there are the ripples and wavelets.  Every little utterance of a government official or company offer, insider buying or selling (which may or may not mean anything), rumour, gossip, and just about anything else can influence the whims of those on the street.  Many people will use these stories to try to make or break a market in the stock.

Over the life of a company, its fair P/E - the "normal" relationship between a company's earnings and its stock's price - is relatively constant.  It does tend to decline slowly as the company's earnings growth declines, which happens with all successful companies.  For all practical purposes, however, that relationship is remarkably stable.  And for that reason, it's also remarkably predictable.

When a company's earnings continue to grow, so will its stock price.  Conversely, when earnings flatten or go down, the price will follow.

The little fluctuations in the P/E ration above and below that constant (fair) value are not so predictable because they are all caused by investor perception and opinion.  Think of them as the winds that blow across the surface of the sea.

The broader moves above and below the norm are the undulations that are typically caused by the continuous rising and falling of analysts' expectations.  When a company first emerges into its explosive growth period, the analysts expect earnings to continue to skyrocket.  Earnings growth estimates in the 50% range or more are not uncommon.

As the company continues to meet these expectations, investor confidence booms along with it, and more investors pay a higher and higher price for the stock.  The P/E rises as a meteor right along with the price.  The faster the growth, the higher the P/E.  This does nothing to alter the value of the "reasonable or fair" P/E multiple.  It just means that investor confidence has risen well above that norm and that there will eventually be an adjustment.

Sure enough, one fine day when the analysts' consensus called for growth of 45%, the company turns in a "disappointing" earnings growth of only 38%.  The analysts start wringing their hands because the company has not met their expectations, and some fund manger sells.  Next, all of the lemmings on Wall Street follow suit.  And not long thereafter you get a call from your broker telling you that you've had a nice ride, you've made a lot of money on the stock, and it's time to take your profit and get out.  In the meantime, the broker has made a commission on your purchase and is hoping to make it on your sale as well.

After a while, after the price and the P/E have plummeted and then sat there for a while, some analyst wakes up to the fact that a 34% earning growth rate is still pretty darn good and jumps back in.   Soon the cycle is reversed.  The market starts showing the company some respect again.  And you get a call from your broker.

Of course, as a smart intelligent investor you didn't sell it in the first place!  Because you were watching the fine earnings growth all along, you knew better than to sell.  And you chose the opportunity to buy some more.  In the meantime, your brokers'; clients who were not so savvy has taken their profits (and, had paid the taxes on them, by the way) and are now wishing that they had stayed in with you.  By the time their broker called them again, the price had already climbed past the point where it made good sense for them to jump in again.

It is best to assume that any price - and therefore P/E - movements that is not related to the company's earnings is transient.  If the stories - not the numbers - cause the price to move, the change won't last.  What goes up will come down, and what goes down will come up.,  You have to be concerned only when the sales, pretax profits, or earnings cause the change, and then only if you find that the performance decay is related to a major long-term problem that is beyond the management's ability to resolve.

Remember also that a sizable segment of Wall Street doesn't make its money investing as you do; it makes its money on the "ocean motion."  Buy or sell, it makes little difference to them what you do.  They make their money either way.  But it sure makes a big difference to you!