There are a lot of misconceptions about what an investor is and how you should “invest” in the stock market. Investors… Real Investors focus on capital appreciation for minimal risk. Investors attempt to maximize their income for the smallest amount of risk incurred. However, the “investors” or speculators focus on trading pieces of paper back and forth called stocks. While the speculator views stocks as pieces of paper the investor views stocks as a portion of a company, a value producing asset.
When a person speculates, they focus solely on resale value, being able to sell the stock at a higher price. The speculator’s only opportunity lies in selling their asset at a higher price, but an Investor has several ways of realizing a profit. When a person invests in a stock they expect in one of three ways.
1.From free cash flow generated by the underlying business, which eventually will be reflected in a higher share price or distributed as dividends
2. From an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price
3.By a narrowing of the gap between share price and underlying business value.
Speculators take comfort in being with the consensus. It is valuable, psychologically, to have someone agree with you. Investors can take no solace in the consensus because they must have a perspective that differs from the masses to be successful. When a sell-off begins speculators begin selling even more, fearing a further depreciation in price, and further drive down the cost of the asset. Upon seeing the sell-off the Investor adds to his position instead of liquidating. It is speculators that provide the opportunity for investors.
I’m not saying traders don’t profit but on the aggregate, they will not because it is a fool’s game, but an investor if their analysis correct will always profit. It is because they buy into the fundamentals not a piece of paper. While it may be difficult to become an investor it is almost certainly worth the reward.