DISCLAIMER: “Sowing Seeds” is a 3-part 4-part series about my uneducated approach to investing. Readers should not take any of this content as a sound recommendation. (I am not a financial professional, nor have I been trained as one.) Be a big boy or girl, and make your own decisions.
First: Part 1, Market Value is Imaginary
Then: Part 2, The Economy is Irrelevant
Finally: Part 3, The Second Best Buzz
Bonus: Part 4, Water Your Own Tree, Slowly
“But, but… what about the economy? What if my business gets ruined by factors beyond my control?”
Don’t worry. It can’t happen. If your business tanks, it’s your fault.
Good times and hard times will be had by all, but businesses don’t get ruined by the economy. They get ruined by unprepared people making foolish decisions: too small a gross margin, not a tight enough control on expenses, over-leveraged, over-optimistic, over-confident, over-staffed, etc. And these decisions usually get made in good times, leaving companies unprepared for the bad.
When there is a common, widespread decline, the theorists come out in droves (just as they do when things are unjustifyingly up) and say how theories A, B and C are the cause for the whole mess. Right now it’s a credit crunch due to banks over-leveraging and not having enough in the bank themselves to cover the loans. For those banks that are in the thick of it, their stock price is plummeting. For those banks that treated the sub-prime trend with caution, their stock prices are down too. But is it justified?
The common error is to think that a stock price is a reflection of day-to-day operations of a business. For the most part it has nothing to do with it. The stock market in the short-term is a popularity contest, not a barometer of financial health. Sure, financial factors influence the stock price, but that affect happens largely in the mind of the day traders and profit-takers, not in the business itself.
I own and run my own business. If someone comes to me tomorrow and offers me $1, then the next day $2, then the next day $1.75, then the next day $0.50, should I panic on the fourth day because the public opinion of my business has doubled, but now halved? Should the daily manic-depressive offers change how I run my business? Of course not. It’s all imaginary.
Taking comfort or pain from macro-economics and believing it is based on scientific truth is the equivalent of judging everyone you know based on someone’s theory of human nature. To be sure, there are qualities amongst us all, and trends and habits that we as humans all share. But to chalk up all of humanity to one theory is simplistic and naive. So it goes with economic theory. One broad-sweeping analysis of an industry, a country or the world cannot capture the individual idiosyncrasies of any one business.
And there’s the rub, matey. What great businesses out there, doing fine, have been unjustly de-valued by the greedy and panic-stricken? What publicly traded company, at no risk of disappearing, is selling at a substantial discount?
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