Most stock market coverage focuses on what's happening in the moment. Why did shares in this company go up (or down) by a few percentage points? What will some piece of news mean for this company or that company?
A lot of people make money trading based on technical reasons or following other short-term strategies, but a lot more people lose money by trying to find a short-term edge. Usually, when a stock moves by a few percentage points, the reason is that an analyst or someone on television said something about the company.
I can go on TV and talk about how rising beef prices may be a drag on McDonald's (MCD) profits in the coming quarter. That may be true, and it may lead to the fast-food chain's stock dropping, but it also may not as share prices rarely move predictably.
In reality, knowing that rising beef prices will hurt profits at a fast-food chain shows no real insight. What you actually need to learn/understand is how the company handles bumps in the road as they will inevitably occur. Yes, you might be able to make some short-term money if you can predict how the market will digest the beef prices/margin news.
But, you can get rich by identifying which fast-food chains (or any other sort of business) will handle problems well. The media -- and pretty much anyone talking about stocks on television -- wants you to keep score daily. The reality is that the only standings that matter are the long-term ones.
People make a lot of mistakes when it comes to investing, but these are the three I see get repeated the most often.
1. Thinking Opportunity Is the Same as Success
Sometimes, a company finds a market or a problem where real demand exists. That's a major step in becoming a successful company, but opportunity alone does not equate to success.
Just because electric vehicle sales will explode over the next few years does not mean that every startup making a needed component for EVs will see growth. Yes, it's possible but so are other ourtcomes. The car makers, for example, could back another source or decide to build whatever they need on their own.
Identifying a company's opportunity is one piece of the puzzle, but it's not the crucial one. Can the company execute? Can it sell? Will it hold up to competition if it establishes the category?
Take Teladoc (TDOC), the online healthcare provider. Its founders identified a growing market, entered it quickly, and captured market share. The problem is that once it established demand, it had very little to differentiate itself from similar platforms offered by existing healthcare providers.
Basically, Teladoc did all the hard work in establishing telehealth as a category, but it may not end up being the winner in the space, or perhaps even a major player.
2. Forgetting That Companies Are Run by People
Would you rather have Satya Nadella or Mark Zuckerberg run your company? Both have had success, but one seems a lot more likely, at least at the moment, to be a stable leader who finds long-term success.
At least with that comparison, there are reasons to believe in both CEOs. In other cases, companies have unproven leaders or bosses with questionable track records. When you evaluate a company, you need to look at management. A brilliant founder may not be an effective operator and someone with ingenious ideas may prove really bad at sales, managing people, and other operational tasks.
Good ideas fail more often when they have bad management. Strong leadership does not guarantee success but bad leadership makes it a lot less likely.
3. Trying to Beat the Market Quickly
Microsoft (MSFT) finished 2022 about 28% down. There's no real reason for that as nothing changed about the company's long-term prospects. People still use Windows, Offices, and Teams while the cloud remains a growing business and the company has only gotten stronger in videogames.
Over the past five years, however, Microsoft is up 171%. If you have owned shares over that time period, you took a loss this year, but your gains have dramatically outpaced the market.
The challenge in investing isn't figuring out what companies will move up or down this week or even this month. It's identifying long-term winners and having the conviction to hold onto them for a really long time.
Microsoft had a bad year, but I'd be willing to be that five years from now, you would regret having sold your shares if you did in 2022.
