Looking Beyond Short-term Prices

Apr 2020

A company’s value comes from much more than its earnings this year. When you own a stock, you indirectly own its earnings forever. Recessions come and go, and so do periods of above-average economic growth. This begs a logical question: If recessions produce only slight changes in long-term earnings, why do stock prices typically fall so much in a recession? There are two primary answers: (1) Some investors mistakenly focus intently on current year results, almost to the exclusion of the future, and (2)  When investors are gripped with fear, they sometimes do things they’ll later regret—like selling more on emotion than reason. Although every bear market in the U.S. has ended at some point, and all ensuing bull markets have ultimately reached new all-time highs, the force of emotion can be very strong, especially to those who haven’t experienced bear markets before. When other investors act emotionally, the conditions are ripe for patient investors … to take advantage of the bargains presented in a bear market.