Tuesday, October 24, 2006

What the heck drives stock prices?

Now this is the million dollar question isn't it? I am delighted to inform you that there are a million answers. Below is a non-exhaustive list of the most relevant answers.

1) The weather
2) Coffeeshop talk on stocks
3) Greenspan's or now Bernanke's facial expressions
4) Fart from sell-side analysts
5) This blog (when MoneyMind features it in 6 yrs time)

There are another 999,993 answers that drive stock prices in the short run which I will omit for obvious reason of space constraint. And two answers that drive stock prices in the long run. By long run, I do not mean 24 hours, or 2 weeks, or 3 months. Sorry, 2 yr with your steady also not long enough. Long run means 5 to 10 to 30 years. Yes, really really LONG RUN.

The answer is consistent earnings growth and valuations. If a company can consistently grow its earnings for the next 30 yrs, AND, further if current stock price has not factor that in, then the stock is a buy.

Now if you really think about it, how many co.s 30 yrs ago grew their earnings for 30 straight yrs? And if they did, wouldn't their earnings probably be like a gozillion times larger since it is compounded over 30 yrs. Well you are right and the answer is, maybe about 5 co.s, globally.

This illustrates how hard it is to find a good company and how harder it is to find one that actually trades below its intrinsic value. This is the truth. And this is value investing. But it is not impossible and the prove is Warren Buffett.

Now just for the fun of it, I have included a list of irrelevant stuff that will drive a lot of monkeys on Wall Street crazy. Be careful when you show this list, sometimes they will be delighted and shit bananas and sometimes they will run wild without their shirts.

1) Quarterly earnings announcement
2) Recommendation change from sell-side analysts
3) Technical outbreaks on stock charts
4) Update on economic indicators
5) News on stocks like M&A, new product launch, CEO change, dividend increase, share buyback, alliance with competitors, entry into new businesses etc

See also Good company but not a good buy
and SWOT analysis


  1. Hi,

    looks like you are a "fundamentalist"...I have just linked my blog to another S'pore trader, but he is more Technical in nature...
    I trade US Futures and may look into US Options in the future(no pun intended, lol)...Do drop by my blog, http://futures-trading.blogspot.com/

  2. Well guess people like us call ourselves value investors. I believe there are other ways to make money as well, be it trading or TA or other methods. There is no monopoly of how to make money.

    But I also believe it will not be easy. There is simply no shortcut. So even as a trader, you will need to put in years of effort. Right?

    Will visit your blog when free!

  3. Yipe. Actually there's a short cut. You can just show us your list of stocks that you think based on the five factors that you have described will perform well over the long term.

    You can do that rite?

    But you wouldn't do that would you? Cos this will make it too easy for readers.

  4. I do use some criteria to screen for stocks. But the criteria are not based on

    Quarterly earnings announcement, Recommendation change from sell-side analysts etc

    I use factors like low PER, high dividend yield etc. will have a post on that soon and provide a stock list in time.

    I can give a man a fish, or teach a man to fish. My blog focus on the latter choice.

    But then again, this is investment, even if I give you a fish, there is 50% chance the fish is rotten!

  5. I am a novice as an investor. And I have beed warned that there are consortiums which can actually control the price movements of the shares in various markets. In the forums, they are referred to as Big Boys(BB).

    Will I be able to learn the virues of "Value Investing"..when the markets are distorted by other considerations and forces?..I have ended up following the speculators...follow the momemtum??

    Some guidance from a experienced hand like you would be appreciated

  6. While it is possible to manipulate share prices, it is illegal in most countries. Usually 2-3 parties will simply keep buying fr one another and drive the prices up, until the general public starts buying and then they sell.

    This trick has been used many times in the past since the 19th century, but now, it is illegal to do such things.

    Value investing requires patience, common sense and some high school math. The first criteria is one that most pple don't have.

    Pertaining to your query, I would suggest that you stop check your stock prices everday. Spend your time doing good research (hopefully a few mths) and buy the stock, and just don't think about it. Every year you will receive your dividends, and if you are free, read the annual report and simply wait until you need the money, then divest it.

    If you are lucky, the stock goes up by 10 folds in 10 years, even if you are not that lucky, the dividends would have made you some handsome return. As per my blog, if you get 8% a year, you are quite good already.