Why Decide Based on Stock Price Is Wrong

Whenever I see investors say this, it proves 2 things. First, they are buying because of the share price, not the business. Essentially, they are traders without themselves knowing when they keep saying they are investors. They are aiming for a few percentages of profit. They may earn pocket change but not build wealth sustainably this way. Investing is for decades, not just for that 1 year or 2 years.

The Danger of Using Stock Price as Conviction

Second, they believe in the share price more than the business itself. When the price goes up, this gives them confidence that the company they picked is the right one and curses a company when their price is going down. They use the price as a conviction of a company's business performance, which is essentially the biggest mistake any stock investor can make.

The Classic Mistake: Buy High, Sell Low

This is also why stock investors almost always make the classic mistake of buying high and selling low when instead they should buy low and sell high. Normally, people want to buy properties at the cheapest price possible and are proud when they get to buy at the lowest. 

But the stock market is one peculiar place where people are always excited to buy more when the share price is going up, i.e., more expensive, but sell in fear when the share price is going down when it's at the cheapest to own a great business. 

Even if I share the next Apple with you, you will still lose money if you invest with the wrong mindset and have the wrong holding period.

Why Investors Struggle With Long-Term Thinking

What is the reason for this behaviour? Simple. Because they have a short-term mindset and they don't know what they are investing in. This is exacerbated by how stock trading platforms present their stock portfolio in terms of profits and losses, which affects them emotionally. Most people are happy to sell for a profit of 20% or 30% because they don't have the conviction that the share price will recover and the foresight to see the company grow for the next 500% or 1,000% in value.

Understanding Temporary Mispricing

So if we buy when the share price is depressed, then how do we profit from it? Read carefully from here. The key is to understand that the short-term price action of a company's stock is affected by fear, uncertainty, and misinterpretation of a company's business. 

That's when investors should be cautious and take advantage of this temporary mispricing of a company's real value. Always believe that the share price will match the fundamentals of the company in the long term. That's a fact.

The Power of First-Level Thinking

So if you use first-level thinking, ultimately it boils down to you understanding your company so well that you have the confidence to scoop the shares when it's crashing down and the conviction to hold for the long term because you know the share price will recover back and reach new highs as your company keeps growing. Avoid using temporary fluctuations in the share price as a source of confidence, as it is a risky approach. 

I hope this post helps you to weather any market volatility and be a better investor. Thanks for reading.