How do we make sense of the ever-fluctuating share markets? Simple, think long term
In life, we are surer about the near term – where we will be tomorrow or what we will be doing next week, but as we think more into the future, the less certain we are of our lives activities
Interestingly, it is the exact opposite in case of share markets
The value of a share of a company should reflect its profitability, which in turn is determined by its brand popularity, technology, manpower skills, sales etc. This profitability figure does not change every second, or every minute or even daily. Usually the profit figures of companies are calculated and published every 3 months, yet the value of the shares fluctuate every second of the trading hours in the stock exchange. Why?
In the short-term, the markets are driven by sentiment. A global event, a government policy announcement, elections or even a strong rumor could change the outlook towards share markets for a short period. These factors often have no bearing on the fundamentals of the business of the company or its profitability, but at that point of time, influence its share price due to either of the human emotions of fear or greed
In the long-term, these events would have shown factual outcomes and there would be no element of human emotion in share prices, only facts. In the long term the change in share price of a company would reflect the company’s profit growth and that alone