Stock Prices: It Matters What Investors Perceive To Be True Even If It Isn’t True

Supply and demand is the major reason stock prices go up and down. The more demand there is for a stock, the more the price is likely to go up. The reverse is true when demand drops and there are more sellers than buyers: the stock price is likely to go down. 

But what causes that shifting demand is what is really hard to wrap your head around.

Companies Are Valued At What Investors Agree They Are Worth

There are millions of investors out there buying and selling stocks every business day. Their actions, and nothing else, determine the price of a stock. That is what makes stock investing so interesting: you can find value where the market has collectively priced a stock incorrectly. 

A good example of this is the most talked about stock in the world: Apple (AAPL). I bought Apple stock in 2013 and 2014 and to date it is my biggest gainer. But at times it has been very hard to keep the faith and not sell when the stock wasn’t doing well. I had to hold on during the stock’s drop from about $131 to $90 during the more than one year period circled below. 

During that time, the narrative in the media was that we had seen peak iPhone, Apple is a one trick pony, Apple can’t innovate without Steve Jobs, Apple products are overpriced and behind in technology, etc.

Every day for more than a year,  “Apple Is Doomed!” dominated the investing world. 

It didn’t matter whether that was true or not. The media and investors collectively had decided that Apple was not the company it once was and that there would be very lean times ahead. The end of Apple was upon us and the stock price suffered accordingly

We now know that everyone who sold the stock during that time period was wrong as the stock price now sits near an all time high at $153. The media pundits were wrong, many analysts were wrong, and everyone who bought into the “Apple Is Doomed” storyline was wrong. But nevertheless, during that steady one year stock decline it didn’t matter that they were wrong because nothing was going to change the direction of the stock. 

Another Example: Ford (F)

Ford is one of my worst performing stocks and one I very much wish I had never bought. You can read why I bought Ford in November of 2014 and again in March of 2015 here

Ford’s 2016 year was its second best in the whole history of the company. You read that right: its second best year EVER! And yet the stock price has done nothing but go down ever since I bought it. 

The reality is that Ford as a company has been doing great and its 2016 earnings are proof of that. Its what I had hoped for when I bought the stock and one would have thought this kind of stellar performance would have pushed the stock price higher. 

But the facts of a great 2016 are no match for what investors believe the real fact(s) are. And what investor’s believe is the thing that really moves a stock up or down, no matter whether it is wrong or right. 

Investors now seem to believe (maybe the whole world believes it too) that the car business is a dying business. It appears to be accepted by almost everyone that we are right around the corner from a world where individual car ownership will be replaced by shared ownership (or rentals) of autonomous cars. If that is true, then Ford will have lots of trouble down the road selling cars in the numbers it sells them in today. 

Another worry, whether true or not, is that electric vehicles will steadily become the norm and that Ford is way behind in that department. Telsa, the cool company that loses more and more money every year and has yet to ever turn a profit is seeing its stock price soar. And Ford, the established and proven car maker with record profits sees its stock price sink. 

Even If It Is Wrong, What Investors Think Is What Moves A Stock

I don’t know whether an autonomous self driving world of shared electric cars will ever happen. Its something that is very hard to imagine and would be one of the biggest life altering change in my life time. If it does happen, I certainly don’t know whether it is right around the corner or 20 or more years away.

But right now this fantastic dream of a new society with electric self driving shared cars is what investors are viewing as fact. They believe it will happen and they are voting with their money: by pulling money out of Ford. For investors in 2017, this vision of the future is fact and that fact is driving Ford’s stock down, regardless of whether it turns out to be true or not. 

I was able to wait out Apple stock’s 1 year dive that spanned most of 2015 and some of 2016 because I had the conviction that all those naysayers were wrong. I thought that their facts were wrong and I was rewarded nicely as every long term Apple shareholder has been. 

But with Ford, I don’t have a clue about the future of self driving cars. I don’t know whether this is all going to turn out to be a lot of hype or whether when I’ll soon be hailing a computer driven car from my phone to come pick me up and drive me where I want to go. I don’t know whether the “facts” that investors are voting for today will turn out to be the real facts but with Ford, I’m not sure I have the patience to wait things out. 

One Response to “Stock Prices: It Matters What Investors Perceive To Be True Even If It Isn’t True”

  1. billy says:

    Mark fields is gone. Maybe this new CEO will change things and building battery cars much faster. I am willing to wait this out.

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