There Must Be Ups and Downs.
Market movements, like the down ones we’ve been in recently, are helpful reminders. They can also be frustrating to endure, but I hope that when you are opening your statements during times like these you don’t miss the bigger picture.
Not only are there ups and downs when investing in the stock market, but there MUST BE ups and downs. The ups are created by the downs, and the downs are a result of the ups. These two things cannot be separated if you, as an investor, want to achieve a return greater than inflation.
Investing is a cost-of-capial story.
As an investor you are providing capital and as being paid for this service. Don’t think for a minute that the stock market is doing anything FOR you as some kind of benevolence. It owes you something. If companies could grow and expand, do research and overcome mistakes without your money, they would. But when their own profits are not enough to do what they want to do, they use some of yours. And when they do, they pay you a return.
Now, they can do this in many ways. The most common two are by selling you a share in the company – stock—or by borrowing money from you by selling you a bond. (Almost everyone knows that bonds are less risky than stocks, but most do not know why. Tune back on Friday for the full reason.)
The over-arching reason that some investments pay higher returns to investors than others is that some investments are a higher risk to the investor than others. And the result of taking that higher risk will be ups and downs – or as we call in in this business, volatility. You cannot get one without the other. Volatility MUST be “paid” if the investor is to get the return.
Don’t Lend Your Money for Free.
So think about it logically. You purchased stock as an investment. The company that sold you the stock, on one hand, wishes that they didn’t have to do that; but on the other, they did it for a purpose. Now, let’s say the company’s board of directors used your stock sale, which produced the revenue they needed to add a product line which they in turn used to make a huge profit. So it paid off for them. Now, they have a bunch of money in their accounts, and they want to buy back your stock. When would they want to do that? Right, when the stock price is low. But if you are the one who “invested” in that stock, when would you want to sell it? Right again, when it’s high.
Don’t let publicly traded companies use your money for free by selling back to them in down markets. Make them pay the FULL cost of your capital. They owe it to you.