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Why We Should Look Forward To Discounts In The Stock Market

Last Friday was known as “Black Friday”, an informal name for the Friday following Thanksgiving Day in the USA. This day is supposed to herald the beginning of the Christmas holiday shopping season in America.

In Singapore, many stores also took up the Black Friday label and announced large and attractive discounts for their goods and services offerings. Customers typically go crazy when they hear of such sales and throng stores to grab the best discounts. However, somehow this does not happen when it comes to investing and the stock market. When stocks are available at large discounts, people tend to stay away. Why is that so?

Tough To Determine Value

One of the main reasons why investors feel hesitant to snap up obvious bargains in the stock market is because of the difficulty in assessing value. If one was buying a washing machine or oven, it is easy to see the features of the product and decide if the price being touted is attractive, or not.

When it comes to evaluating companies, many investors lack a sense of what’s expensive and what’s cheap, mainly because they do not rely on simple valuation metrics and simply use price as a deciding factor.

Inventory, Rather Than Assets

Another problem with investors is that they tend to treat shares as inventory (to buy and sell), rather than assets (which generate a return from cash flows). When shares are treated as inventory to be repeatedly bought and sold, a natural fear arises when share prices plunge as this means that a loss would be incurred when the shares are sold at lower prices.

However, when shares are treated as part-ownership of a business, they function as assets which generate cash flows (i.e. dividends) for the shareholder. Lower share prices would be perceived as attractive as this means the return to the shareholder will be enhanced as dividend yield rises.

The Foolish takeaway

Serious investors should, therefore, embrace Black Friday in the stock market as this means that they can find lots of attractive bargains for good, well-run and cash-rich companies. Instead of heading for the exits and feeling worried and scared when there’s a big sale in the stock market, investors should happily scoop up shares in companies to hold for the long-term.

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