Most stock market coverage focuses on what’s happening at the moment. Why have shares of this company gone up (or down) a few percentage points? What will news mean for this company or business?
Many people make money trading for technical reasons or following other short-term strategies, but many more people lose money trying to find short-term advantage. Usually, when a stock moves a few percentage points, the reason is that an analyst or someone on TV said something about the company.
I can go on TV and talk about how rising beef prices can be a drag on McDonald’s (MCD) – Get a free report earnings in the next quarter. That may be true, and it may cause the fast food chain’s inventory to decline, but it may also not be the case because stock prices rarely move in a predictable way.
In reality, knowing that rising beef prices will hurt a fast food chain’s profits shows no real insight. What you really need to learn/understand is how the company handles obstacles in the road as they will inevitably occur. Yes, you might be able to make some money in the short term if you can predict how the market will digest news about beef prices and margins.
But, you can get rich by identifying which fast food chains (or any other type of business) will handle the problems well. The media – and pretty much everyone who talks about stocks on TV – wants you to keep the score daily. The reality is that the only rankings that matter are the long-term ones.
People make a lot of mistakes when it comes to investing, but these are the three that I see repeated most often.
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1. Thinking that opportunity is the same as success
Sometimes a business finds a market or problem where real demand exists. It’s a major step to becoming a successful business, but opportunity alone doesn’t equal success.
Just because EV sales will explode over the next few years doesn’t mean every startup making a necessary component for EVs will experience growth. Yes, it is possible, but so are other results. Automakers, for example, might support another source or decide to build what they need themselves.
Identifying a business opportunity is one piece of the puzzle, but it’s not the most crucial. Can the company execute? Can he sell? Will he hold out if he founds the category?
Take Teladoc (TDOC) – Get a free report, the online healthcare provider. Its founders identified a growing market, entered it quickly and gained market share. The problem is that once demand was established, there was little to differentiate from similar platforms offered by existing healthcare providers.
Basically, Teladoc has done all the hard work to establish telehealth as a category, but it may not end up being the winner in the space, or maybe even a major player.
2. Forgetting that businesses are run by people
Would you rather Satya Nadella or Mark Zuckerberg run your business? Both have had success, but one seems much more likely, at least for now, to be a stable leader who enjoys long-term success.
At least with this comparison, there’s reason to believe in both CEOs. In other cases, companies have untested leaders or bosses with questionable backgrounds. When evaluating a business, you need to look at management. A brilliant founder may not be an effective operator, and someone with ingenious ideas may prove very bad at sales, people management, and other operational tasks.
Good ideas fail more often when poorly managed. Strong leadership does not guarantee success, but poor leadership makes it much less likely.
3. Try to beat the market quickly
Microsoft (MSFT) – Get a free report ended 2022 with a decline of around 28%. There is no real reason for this as nothing has changed in the company’s long-term prospects. People are still using Windows, Offices and Teams as the cloud remains a growing business and the company is only getting stronger in video games.
Over the past five years, however, Microsoft has grown 171%. If you’ve held stocks during this time, you’ve suffered a loss this year, but your gains have significantly outpaced the market.
The challenge in investing is not which companies will rise or fall this week or even this month. It’s about identifying the long-term winners and having the conviction to keep them for a very long time.
Microsoft had a bad year, but I’d be willing to be that in five years you’d regret selling your stock if you did in 2022.
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