It can be exciting to invest in stocks, especially when they go up. But as shareholders celebrate their gains, they should remember that the stock performance can be disconnected from the business results. In this video from Motley Fool Live, recorded on Jan. 14, Motley Fool contributors Brian Feroldi and Brian Withers discuss the difference between stocks and the business and what investors should always remember when looking at their stocks.
Brian Feroldi: This one's a hard lesson to learn, but at a point, you have to learn it. The stock and the business are not the same thing. In the short term, those two things have nothing to do with each other. The stock can go up while the business is going down, the stock could go down while the business is going up. If you pay attention solely to the stock price, you will make mistakes and you will not learn. Don't watch the stock, watch the business.
When I say the business, what I mean is business news and earnings reports. Those should instruct you. What does management say on the quarterly conference calls? What's happening with margin trends? Are there a competitor that's taking market share? That is what should inform your decision-making, not what has the stock price done recently. But boy, is that a hard lesson to learn.
Brian Withers: Yeah. There was a lot of my Netflix (NFLX 0.58%) [mistake] when I look back. I did a show with Tim [Beyers] about one stock we wish we hadn't sold. I did the Netflix thing and I had put my buys and stuff along with the milestones that Netflix was hitting: 10 million customers, 20 million customers in Europe, started streaming services. I sold the business when it started streaming. Good grief. That was just ludicrous. [laughs]
That was definitely a stock versus business thing, and I was totally looking at the stock, and fear of losing what I had gained, and wasn't looking at the incredible promise this business had.