So far I concentrate my contents on the business and the importance of a good management, now we have to speak about the market price.
The stock market is auction based. Roughly speaking; agents that compose the market (institutional investors like pension funds or retail investors like us) offer a price for any security exchanged (for example stocks) on the market.
The price depends on the money that any agent is willing to pay to another agent for a given stock (company’s ownership) i.e law of supply and demand.
Said that, it is obvious that inside this market there is a lot of human nature, in other words: emotions.
Fear, greed, envy, pride, self-esteem are components of human nature that characterise the market auction based dynamics.
At this point the situation becomes complicated, because the market can be seen as if it were a person itself, namely Mr Market.
The best explanation was stated by Benjamin Graham, father of Value Investing, and revisited by Warren Buffett.

“Mr. Market is kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused you sell to him, and if he gets depressed, you buy from him. There’s no moral taint attached to that.”

Warren Buffett

For better explain this point I would show you a chart.

As you can see, Tesla stock more than quadruples its value in less than 6 months, anyway the fundamentals financial valuation metrics don’t fluctuate in the same way over the short-term. 
A simple example is the market value of Tesla. At the moment Tesla’s market capitalization is double than Toyota even if Tesla sells an infinitesimal number of cars compared to Toyota.
Clearly that isn’t a sufficient analysis, anyway is better to be careful about the stock price skyrocketing.
Conversely in the long run, fundamental data of the business and the price we will eventually converge.
For that reason you don’t have to focus on the short term fluctuation, if not to take advantage on the discounted price. Your wealth will generate over the long term.
What causes that short term fluctuations? As I said early, the stock market has an emotional reaction to any short term news that click bait media throws us.
The modern world is full of news, data and information, this because there is always someone making a living thanks to your click on the last news s/he writes.
The secret is to concentrate on fundamentals data and not on the latest news on CNBC network, and that’s the goal of my blog.
But if you are enthused about Tesla’s chart, I will show another chart that shows you what happens when emotion takes place of rationality.

I can’t predict the future of Tesla. Anyway as you can see, when Mr Market changes its mood, you might lose a good part of your capital.

I’ve to quote again the best investor of all time, Warren Buffett:

“Be fearful when others are greedy, and greedy when others are fearful.” 

Warren Buffett

In other words, if you want to be a good investor you have to be a contrarian. Above all, you have to make decisions based on the facts and not on the emotions, and stock price sometimes represents this collective emotion response.

“I’m not emotional about investments. Investing is something where you have to be purely rational and not let emotion affect your decision making – just the facts.”

Bill Ackman – Pershing Square Capital

Remember: any time you buy a stock, somebody sell you this stock. You have to ask yourself: “Why I think I’m in the right side of the transaction?” Remember that on the other side there will be a professional investor with an IQ of 140, an AI algorithm or even Warren Buffett.
In the continuation of my blog, I will explain how to value a business and what kind of traps to avoid during the path.

Following chapter 9. Value investing

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