Reuben Gregg Brewer, The Motley Fool
5 min read
I’ve been investing since I was a teenager, thanks to my dad. At first, I saw the stock market as a way to “get rich quick.” Over time, I realized that building wealth wasn’t as simple as I thought, which dramatically changed the way I invest. And it all boils down to the real point of the stock market: a public forum where companies raise capital.
Essentially, the stock market allows investors to buy small pieces of a business. But too many people see those pieces as little more than a symbol on a brokerage statement, which is the opportunity for long-term investors. And why I’m buying consumer staples stocks like McCormick (NYSE: MKC) even as other investors sell them.
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What is a stock worth?
A stock exchange allows investors to trade stocks. At any given moment, a stock is worth whatever the seller is willing to accept and the buyer is willing to pay. But investors are driven by emotions over the short term, so stock prices can be highly volatile. Famous investor Benjamin Graham, who helped to train Warren Buffett of Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) fame, likened Wall Street to a voting machine over the short term.
However, he also said that Wall Street was a weighing machine over the long term. This is actually the root of Warren Buffett’s success: his investment approach involved buying good businesses at attractively valued prices and holding them for the long term. Essentially, he wanted to pay a fair price for a business and then benefit from the company’s growth over time. As that growth shows up, stock market investors tend to reward a company with a higher share price, even though the share price will vary dramatically over the short term.
Use the stock market to your advantage
Unfortunately, too many people invest like I did when I was young. They are trying to make money as fast as possible, which leads them to trade frequently and aggressively. That pushes stocks to extremes, making them volatile, even if the underlying business has a long and successful history. Graham described this as Mr. Market.
Mr. Market is your partner, and he is highly emotional. Some days, he will sell you his share of a company for very little because he’s despondent. Other days, he’ll buy your share of a company for a shockingly high price because he’s enthusiastic. If you can see this pattern, you can take advantage of Mr. Market’s mood swings, buying when he’s despondent and selling when he’s enthusiastic.
