Stock Indexes As Businesses
It’s well known that stock investments are just business investments. When people purchase a piece of property, such as a farm, a rental property, or a private business like a restaurant, they tend to view them as business investments: they measure their investment results based on how much such a business makes along the time. Seldom they keep checking their business’s valuation quotes monthly, let alone daily. Over times, they might need to exit such a business and only then they start to quote and value their properties as a wholesale price.
This is not what happens in public stock investing: with the advent of daily, hourly and even stock price quotes in seconds, the investors’ wealth or fortune fluctuate wildly based on these real time stock quotes. Unfortunately such appraisal is not accurate and can swing to both extremes.
It’s thus advocated by many successful investors such as Ben Graham and Warren Buffett that investors should focus on the underlying business of a stock, ignore short term prices and invest just like an investor in a private market (a private investor such as a startup investor, private business investor or a rental property investor). If the underlying business performs well and your purchase price is right (cheap enough), you’ll make money.
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