In the short run, stock markets are all about emotions. When investors feel confident they buy stocks, pushing stock prices up; and when investors feel afraid they sell stocks, pushing stock prices down. Stocks follow emotions, in the short run.
In the long run, stock markets are all about profits. As the economy grows, corporations earn profits, and these profits drive up stock valuations. Stocks follow profits, in the long run.
Emotions in the short run, profits in the long run. This explains just about everything we need to know: why stock markets are volatile and unpredictable in the short run; and why stock markets have historically gone up in the long run.
If one believes that human ingenuity will continue to solve problems and drive economic growth and corporate profits, then one can calmly pursue a long-term investment strategy. The negativity in the daily news becomes less of an issue.
Emotions in the short run, profits in the long run, also explains how Mutual Fund portfolio managers do their work. They look for profitable corporations and then buy their stock when fearful investors are pushing the price down, and then they sell the stock when confident investors are pushing the price up. It’s actually a pretty simple process.
Understanding how stock markets function, and how Portfolio Managers do their work, makes all the difference. It opens up a wonderful opportunity to invest calmly, with little worry.
This memo was prepared solely by Terry and Patty Rempel who are registered representatives of FundEX (a member of the Mutual Funds Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this memo are those of Terry and Patty Rempel. Bluestone Financial is a personal trade name of Terry and Patty Rempel.
