Market Is Not Efficient All Time

Small businesses face an interesting paradox: they are less well researched but also easier to study. Accounts are simpler, management is more accessible, and business segments are limited compared to larger companies. The market frequently misprices Small-cap companies because they are relatively illiquid and often ignored by larger participants.

 

Buying low and selling high is always a good strategy, and Mr. Market continues to provide us with plenty of opportunities to do so, even with long-lasting, well-established, and widely followed businesses. These companies are referred to as "stalwarts" by Peter Lynch. This is because they are large corporations with little room for expansion. However, you can occasionally buy them at a discount and sell them after a 30% to 50% increase, owing to the valuation multiple reverting to the mean rather than the business value increasing. 

 

Always keep in mind that stock prices fluctuate randomly every day, sometimes wildly on either side, whereas business value changes very slowly. Therein lies the abundance of opportunity. It is part of our evolutionary instincts to focus on what is moving. This explains why market participants are more concerned with stock prices, which fluctuate, rather than business values, which change slowly.

 

The primary factor we consider is liquidity, which is a combination of an economic overview. Contrary to popular belief, looking at the great bull markets of this century, the best environment for stocks is a very dull, slow economy that the Federal Reserve is attempting to kick-start.

 

Because of the tense environment, investors usually increase their efforts during a bear market, becoming complacent during a bull market. Instead, dream big, manage risk and increase your efforts to achieve financial independence early in life during a bull market. If you are fortunate enough to experience a bull market, make sure it makes a significant difference in your life. Make the most of a bull market to increase your earnings. Make the most of a downturn to learn.

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Units 26/35