How To Survive the Stock Market Mania
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The other day, I was having a conversation with a good friend of mine who has been second-guessing himself on one of his investments. He’s built up quite a big position in a company that, on paper, seems like a winner.
The company has been growing its sales, earnings, and free cash flow at a pretty steady clip. Earlier this year, they even announced a 25% dividend raise!
Overall, the company is fundamentally heading in the right direction. Still, despite these consistently positive developments, the stock price has been plummeting lately—down 17% in the last month and 9.3% in the last year—which has him wondering if he made a mistake with this investment.
I immediately thought of a quote from Warren Buffett in the 1987 Berkshire Hathaway shareholder letter that perfectly addresses this situation:
“Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: ‘In the short run, the market is a voting machine but in the long run it is a weighing machine.’ The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
This quote from Buffett, which is a nod to his mentor (and the father of Value Investing) Ben Graham, offers a crucial lesson for any investor: the share price is not always a reliable indicator of a company’s true value, especially in the short term.
In the short run, the market operates as a "voting machine," where prices are influenced by news cycles, investor sentiment, and often erratic behavior. This can create volatility in share prices that don’t necessarily reflect the underlying fundamentals of a company.
My friend’s experience is a perfect example of this. Despite the company’s strong performance, the stock price has been lagging—especially in the last month.
On the other hand, over the long term, the market functions as a "weighing machine." This means that eventually, a company's stock price will reflect its actual intrinsic value based on the underlying fundamentals. These are what ultimately drive long-term results.
The speed at which this occurs is less important than the fact that it will (eventually) happen if the company's fundamental performance continues to trend in the right direction. It’s also important to note that it rarely happens on your desired timeline, so patience is key.
In my friend’s case, the share price dropping isn’t all bad—especially if the business is still performing well. He now has the opportunity to acquire more shares of this seemingly strong company at a discounted price and with a higher dividend yield, which can set him up for greater gains when the market eventually catches up to the company’s true value.
As you know, investing can be a rollercoaster of emotions, especially when the share price is at a disconnect with the fundamentals. This is the double-edged sword of dividend investing, and it's important to stay focused on the bigger picture.
Patience, discipline, and a strong faith in your investment strategy are key to surviving the short-term market mania. You have to trust that the true value of your investments will shine through in the long run.
With that said, I want to hear from you: What helps you tune out the "voting machine" and focus on the "weighing machine"? Write to me here and let me know.
And a big thank you to all of the readers who responded to last week's newsletter! You can read some of the responses down below in the "Hot Takes" section. 👇
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SINCE YOU ASKED 💬
"Complete beginner. Never invested before. I'm using Fidelity. Do you think it's wise to put $10k in for my first time? I have it, I'm just scared."
- @DFullerLisa | YouTube
I totally understand the fear that comes with investing for the first time. To help ease some of that anxiety, you might find a dollar-cost averaging approach to be a better way to go than investing the entire $10,000 at once.
With dollar-cost averaging, you invest a fixed amount regularly, such as $1,000 a month for ten months or $100 a week until you’ve invested the full amount. You can break it up however you'd like.
Spreading out your contributions can make the process less stressful since you don't have to worry about timing the market perfectly. It allows you to ease into investing at a comfortable pace, and you can always increase your contributions once you find your groove.
Regarding what to invest in, I'm a huge proponent of ETFs (Exchange-Traded Funds) for beginners. ETFs let you invest in a diverse range of stocks, which takes a lot of the guess-work out of it and helps spread out your risk.
If you're looking for some good ETF options, I’ve ranked 10 of the best dividend ETFs here.
Have a question? Ask me here to see it featured in an upcoming newsletter.
HOT TAKES 🔥
Last week, I asked readers to share the last time they were wrong about an investment. Here are some of the responses:
Matt said: I had that today when I sold out of 2 stocks that were not in line with my dividend investing strategy, and I was also losing money on too. I’m talking about SMCI and SOUN. Thought they would be good to ride the AI wave but realized I don’t need them due to my many shares of NVDA making $$$s.
Deepa said: I bought NVDA at $75 like 5’ish years ago, but it wasn’t going anywhere and I thought it was a dud and sold my shares. (Very Crying Emoji). I have since restarted and have an auto daily buy on it, invest it and forget it is my new motto with NVDA and a few others.
LAST WORD 👋
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Click here to join the DRIP N' Sip Discord group. Like I said, it's totally free, and I look forward to seeing you in there!
