What if you had a friend you couldn’t trust. Some days he is enthusiastic and others he is in deep despair. Some days he is on an even keel, others he seems manic.
When you need him, he may not be there. Gossip and buzz make him tick. He thrives on them. He is flakey at best and erratic at worst.
That doesn’t sound like a friend most of us would want to have. But that’s the stock market.
The stock market is not your friend.
And while the stock market is not your friend, it’s certainly not your enemy either.
The market doesn’t know you – in fact, it doesn’t care to know you – and it’s not looking out for your best interests. Sometimes investors forget what the market really is: A collection of buyers and sellers meeting together to transact business.
Remember, the stock market started out as an in-person exchange, where sellers met face-to-face with buyers to trade shares of companies. Today, everything is done electronically. This faceless nature of today’s markets can distort people’s perceptions of it.
Rather than seeing the stock market as a live auction – just like a land auction attended by farmers – some people view it as a casino. It’s not.
I wish more investors treated the stock market like a land auction, quite frankly. When a farmer buys a plot of land, there isn’t a thought of selling the land the next day to book a quick profit. It’s bought with the intention of holding onto it for years or decades – or forever.
Let’s say a farmer buys a good parcel of land at a good price. The land looks to generate a reasonable return that will make the farmer wealthier over time. Do you think that same farmer would care if a neighbor stops by a month later and offers to buy the land for 30% less than he purchased it? Would the farmer despair that his investment has “lost” value?
No. He wouldn’t mind one bit. He would promptly dismiss the offer and go on planting and harvesting his field for years to come, reaping the financial benefits along the way.
But when some stock investors, who buy a good investment at a good price that looks to generate a reasonable return over time, are confronted with a similar offer to buy their investment for 30% less than their purchase price, they immediately panic. They question why they bought the investment in the first place. They may even decide they need to sell the investment before it falls even more in value.
Why is that?
I think it’s because farmers know what they bought. They understand land. They can see it, walk it, and tend to it.
Stock investors can’t. There is nothing tangible about stock investing. Shares are held electronically, so there’s no holding them or tending to them. In the past, investors at least had physical stock certificates. We don’t even have those today.
For that reason, stock investing can feel more like gambling. And while some people treat the stock market like a casino, again, it’s not. Your goal is to buy good investments and hold them for a long time, just like a farmer would with land. Anything other than that is speculating.
The stock market will always have its ups and downs. Occasionally, the moves will be dramatic. But don’t let the vagaries of the market influence how you think about your investments.
The market is there to serve you, not instruct you. If you don’t like what it’s offering, feel free to ignore it. You won’t hurt its feelings. It’s not your friend.
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