2018 has been a year full of scary headlines and big drops down in the stock market. If you’ve been an investor during this time, I’m sure you’ve seen multiple days where your stock drops in value much more than you would’ve liked.
Of course the invention of the internet has proliferated the potential for overreaction on every day of big stock drops.
Twitter can be especially bad. A 1% drop in stock prices can set the Twitterverse ablaze, with people and articles popping out of the woodwork to give their bad opinions. But if you follow the right people, you can get good perspective that helps you think in a more profitable mindset.
For example, instead of over dramatizing the 1% drop and creating worry and dread like the media, the Twitter accounts I follow were sarcastic, funny, and making comments like @michaelbatnick:
“S&P 500 tumbles at the open to +5.9% for January.”
Wow.. good point… the market has been crushing it since 2009. Compare that what happens when you Google “S&P 500”:
“What’s behind the stock market’s biggest one day drop since August”
With a picture of a guy in a suit (looks like he works on the trading floor) with his balding head buried into his hand in tired frustration.
Glass half full vs. not, right?
Anyways, let’s talk about the big picture instead of little picture. When a stock you own sees a price drop, it can be very good or very bad. But you have to be thinking long term.
The difference is in the impact of long term business results.
When a stock drops, a lot of the time it’s because something happened that was less favorable. Like with Apple earlier in the year, iPhone X demand dropped (according to headlines) “because of lower demand because of the $1,000 price point”.
It’s not necessarily bad for the long term. If it’s a temporary hiccup, but Apple continues steady growth, then that looks like a chance to bargain buy.
But say people are straying away from Apple because Androids are now the “cool” phone. In that case the demand is a symptom of lower revenues and earnings to come. That’s where it’s bad.
You can never tell with certainty which of the two cases it’d be for every (or any) company. It may get harder with industrial stocks or b2b businesses.
That’s why we need to differentiate from a numbers standpoint. It’s the only way to be able to analyze any big stock drops– which is how to increase chances that we’ll be more right than wrong.
I’ll give you a couple more examples. [continue reading…]