Dealing with the apparent chaos of the stock market
Stock investing is an intensely psychological game. Short-term price movements create stress and a constant desire to understand why the market did what it did today. For most people the stress of watching the value of a portfolio fluctuate daily or hourly is simply too high a price to pay for the opportunity offered to stock investors.
To relieve the stress, stock investors attempt to discover order underneath the chaos of violent price movements. Strangely, it is more important to believe that order can exist in the market than it is to find the very best model. This belief in an underlying foundation can result in reducing stress and preventing emotional responses to market fluctuations.
Here at Dock Street we believe that owning growing businesses is the best way to combat this stress. Others adopt different strategies–technical analysis, value investing, theme investing, etc.
One thing is certain—switching from one strategy to the next is a recipe for disaster.
So the “order” that we find in the market is simple: growing profits in a business that produces extraordinary returns on the capital invested. Belief in this particular order is what keeps our wits about us preventing panic and, hopefully, euphoria.
Right now we are being highly rewarded for the strategy we employ. Inevitably, this will be followed by a period when our type of stocks go out of favor. We can’t promise that our methods will work every year, but we do promise to stick with what we know and what has worked for us over time.
Daniel A. Ogden