Investors who want to buy stocks should hope prices go lower, but that’s easier said than done. It’s never fun seeing something you bought last week trading at a 20% discount.
The key to success in the stock market, though, is finding ways to be able to buy shares when prices are cheap. And this is more about mindset than technical knowledge or expertise.
Trading and investing
In the stock market, there’s an important difference between trading and investing. Traders look to make money by buying shares at one price and selling them at a higher one.
There’s nothing wrong with this. But for traders who buy a stock, seeing the price go down is a bad thing – it makes it that much harder for them to make money.
Investing is different. It involves trying to make money from the underlying business and the cash it generates, rather than by selling it to someone else at a higher price.
For investors, seeing a stock they own go down is a good thing. Selling isn’t part of their plan, so a lower price gives them a chance to buy more of the firm’s future profits at a lower price.
Staying calm
I think remembering the difference between trading and investing can be helpful when share prices fall. For investors, this just doesn’t make any difference to how things are going.
If a stock falls because of a change in the underlying business, that’s an issue for investors. But it’s unusual for a company to become 20% worse than it was all of a sudden.
A good example is Meta Platforms (NASDAQ:META). The share price is down 23% from its 52-week high, but investors who bought the stock at those prices might not need to worry.
It doesn’t look as though much has changed with the underlying business. The only difference is how the stock market is looking at the same evolving situation.
Focus on the business
The thing that caused Meta’s share price to fall was its Q3 earnings report. The company increased its guidance for the amount it plans to spend on artificial intelligence (AI) infrastructure.
The market had previously viewed this kind of thing as a positive sign. But investors are now a bit more wary about what returns the big investments will ultimately generate.
Another concern is depreciation. Meta’s accounting is based on its chips having a useful life of five years, but with Nvidia launching new products every year, this might well be ambitious.
The firm’s competitive position, however, is still intact. And this gives investors looking for a return from the underlying business something to focus on as the share price falls.
Investing ups and downs
Big moves in the stock market are often the result of a change in investor sentiment, rather than a change in the underlying business. And I think that’s the case with Meta’s recent fall.
In these situations, investors might want to take another look at what they own. But if things are largely going to plan for the company, they don’t need to worry.
Unless they want or need to sell their investments, a lower stock price isn’t a problem. And it might be an opportunity to buy more shares at a more attractive level.
