Happy hour is everyone’s favourite, who can resist the idea of getting two drinks for the price of one? Happy hour happens on the stock market all the time, and just like our favourite pub we need to know when low prices are on offer.
Let’s look at the happy hour concept and how it would relate to the stock market.
In the usual happy hour experience your average beer costs 50% less than what it normally costs. This 50% saving does not change the real or actual value of the beer, it’s the same beer we always drink, no change to freshness or flavour, it is simply purchased at a better price. If we purchased three discounted beers during Happy Hour and still had one left after Happy Hour was over – when the price went back to normal – we could look at it as having made a profit.
This is how we should consider opportunities on the stock market. Good investments are often companies that have not decreased in value but their share price has declined.
So why do average investors find it so difficult to buy shares (unlike beers) that have declined in price? The reason is simple – most people understand the value (quality, taste, refreshment) of a beer relative to the price of a beer. This price vs. value ratio remains relatively static (low volatility) for beer over time and people generally end up paying roughly what they expect to pay for their favourite brew.
This price/value ratio is harder to know for shares in a company and consequently trickier to assess when shares are cheap or expensive relative to their value. As “knowing” is more difficult, many investors revert to buying or selling based on how they “feel”, leading to a common investor behaviour of buying shares (beers) when the price goes up, instead of when they are on sale.
The happy hour concept aligns to one of Warren Buffett’s key philosophies to buy into historically strong brands with a low share price and to hold those shares for a long period of time. Most of Buffett’s share purchases have proved to yield great returns in years to come, but patience and understanding is integral in this process.
Share prices change everyday, as a result of variable market forces. If more people want to buy a certain share than those wanting to sell, the price of the share will go up. Similarly, if more people are selling a share than buying, the share price will fall. It is important that we do not use price movement alone as an indicator of the value of shares as share price declines may have nothing to do with the actual soundness of the business. Share prices disconnected from the value of the business can represent an opportunity to buy shares in a fantastic business at a bargain price. Happy hour on the Stock Market occurs during market declines and crashes, when all shares are marked down, regardless of their quality.
Make sure that you buy stocks that are priced below the true intrinsic value of the company. Contact AXIAM to help look at companies and brands that would help your investment grow.