Sentiment and Stock Prices

Dec 2020

… suppose John and Jane bought a stock early this year.  That stock, representing partial ownership of a company, will provide them, their heirs or new owners usefulness (dividends, for example) over many years.  Accordingly, its long-term economic value is unlikely to change a lot over a few months.  Nevertheless, stock prices can and do change very significantly over the shorter term.  Why’s that?  Sometimes business conditions change, but more often than not the sharp price swings we see on a near-term basis are primarily the result of sharp swings in investor sentiment.  If there is one point we wish we could imprint in investors’ minds, it’s that there is a strong tendency for swings in sentiment to be much greater than swings in economics or in long-term business conditions.  Put differently, investor fears and euphoria both tend to be overblown.