In stock investing, we focus on the value of the business behind the stock. Remember, when you’re buying a stock, you’re buying part ownership of a business. What drives the value of a business? Well, simply sales, net profit, and cash flow.
As investors, we want to identify good businesses by reading their financial statements. What these good businesses have is a sustainable competitive advantage that allows the company to increase its sales, profit and net income consistently over time.
When you identify a good business, you are confident that over time the company will increase in value. By buying and holding this company’s shares, you believe that the price will eventually become higher and bring you profits.
But here’s the thing: In the short term, does the share price always reflect the true value of the company? No, it doesn’t.
Because in the short term the stock market can be irrational; in other words, highly emotional. Share prices are driven by demand and supply that are driven by emotions like fear and greed. These, in turn, are driven by events like tariffs and trade wars. So in the short term, stock prices move up, down, sideways, up, down, etc… in the short term.