In a word: Belief
One word...Belief! This simplification of a single word drives market perception in reference to trading and investing!
The more money backing the belief, the more tangible that belief becomes. In contrast, the more buyers with a belief that the price of a stock price is too high, the more the stock prices falls as sellers drop their prices to meet buyers’ expectations so they can sell their stock. The buying and selling that moves a stocks price up or down is the realization of that belief. For example, if you found something of value that you wanted was cheap, you'd buy more of it. But do you know the future price of it? That's not part of the equation for most casual investors. When they see a bargain price they buy it expecting that it will be worth more later. If they see a better value elsewhere, then they buy that. If there is a real bargain, they'd buy the cheapest one. Yet they make that purchase not knowing what the future value will be. The explanation for this is simple…it's just belief.
If investors were holding some shares of a stock that was expensive, they would happily sell it at the right price. Until they sell, they hold the shares. If new buyers come along, those shares aren't for sale, and they have to pay the lowest price they can find, which might not be a true bargain, but it's a relative bargain for what they believe the shares will be worth in the future.
Strangely, the average casual investor won't dump a bad investment because they don't want to realize the loss. They hang on. The investors are told to hang on because its more advantageous for the Wall Street businesses. It’s not good for the investors. There is a large statue on Wall Street of a bull, meaning that buying is great. However, there isn’t a statue of a bear. They don’t want to talk about that. It’s bad for their business. And the falling 'bear' market will come as surely as the bull market. An agile investor will sell their shares in a falling market and reinvest when the conditions are better.
Investors don't need to wonder if there is a secret formula or other factors driving the market. And yes, there are formulas that people use to manipulate the markets. These formulas are an expression of belief.
There are only four times a year when the price of a stock are almost right, and that’s after their financial reports come out. Even then, the prices are out of date by a few weeks since it takes time to calculate all those numbers. That won’t tell you the future price accurately. It only shows you what the company's expenses and profitability. The future is always a guess but guided by rational expectations. “Value Investing” uses the numbers and sees the future potential...it is NOT based on belief!
