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Why Stock Prices Should Never Be the Determining Factor When You’re Making Investment Decisions

Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

I wrote an article last week titled Why You Should Not Focus On Price When You’re Thinking Of Selling Your Stocks. In it, I discussed why stock prices should not be used as a determining factor when it comes to selling stocks.

I have been reading a classic investment book lately called Common Stocks and Uncommon Profits. It’s written by Philip Fisher, a man who had helped shape billionaire investor Warren Buffett’s investing philosophy. In Fisher’s book, I found a passage that lends weight to the idea that investors should not focus on prices when making investment decisions.

Here’s Fisher on the topic:

 “For some reason, the first thing many investors want to see when they are considering buying a particular stock is a table giving the highest and lowest price at which that stock has sold in each of the past five or ten years. They go through a sort of mental mumbo-jumbo, and come up with a nice round figure which is the price they are willing to pay for the stock.

Is this illogical? Is it financially dangerous? The answer to both questions is emphatically yes. It is dangerous because it puts the emphasis on what does not particularly matter, and diverts attention from what does matter”

The passage above from Fisher sums up coherently the crucial concept of not relying on stock prices to make investment decisions. The price of a stock does not tell you anything about the underlying value of the company’s businesses. It says nothing about important aspects of a company such as its future prospects and the presence or absence of any competitive advantages.

In short, a stock’s price tells you nothing about its value.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.