One of my favorite things about working here at the Fool is being able to live and breathe investments every day. I get the chance to follow not just the companies I happen to own myself, but many different companies across many different industries.
Over time, such an environment could easily lead one to believe he or she "knows" more about a company than everyone else, or understands precisely what makes the shares move on a day-to-day basis. Unfortunately, nothing could be further from the truth.
Anyone who tells you what will move a company's shares over the short term is, to be polite, fibbing. But this fact doesn't stop people from trying. Over the past week, I've noted a few of the more common short-term myths I've recently read in the papers or seen on TV:
It's the market-makers' fault
Watching shares move up, down, and all around can be trying, to say the least. This effect is accentuated in small caps, which by their nature often have small floats. But this creates opportunities rather than problems for the savvy investor.
For an investor who really understands the operations and prospects of a company like FARO Technologies (NASDAQ:FARO), the ups and downs of stock prices can create numerous opportunities for building a fairly large investment over time. I know some investors take this route and seize the opportunity, but there is also a subset of the market that believes all shares, especially those of the companies they own, are manipulated. In truth, if you hold a solid company, your shares are going to realize their intrinsic value eventually. Rooting around for the supposed conspiracy that drove down the share price is not a constructive use of time.
The left-behind myth
This one might be my favorite. I'm assaulted by it most often while watching CNBC. It goes something like this.
Caller: I hold shares of Short-Term Thinking. With the recent market run-up, Short-Term Thinking has been left behind. Should I continue to hold, or will Short-Term Thinking ever catch up?
Host: Short-Term Thinking is a wonderful company. Its earnings were softer than the Street's expectations. I'd hold them here.
Let's ignore the fact that the caller is looking for free advice specific to his or her situation. The party I feel most sorry for here is the host, because this isn't an easy question to answer. But if you find yourself on TV, you're likely to feel compelled to answer whether you know what you're talking about or not.
What I'd really love for a host to say is that companies do not really get left behind. The share price may not move in the direction you expect at the time, and a company's real value may become disconnected from its share price, but the company itself did not get left behind. All companies, even high flyers such as Google (NASDAQ:GOOG), eventually get to a price that reflects their value.
What you think you know can hurt you
We investors often get ourselves into trouble by trying to guess when that next big move might come. Anticipating a stock's short-term movement on the basis of its recent performance is not an easy task. Retail stocks are good examples.
On more than one occasion lately, I've heard a number of analysts and talking heads mention that retail is a can't miss, because last year's back-to-school numbers were so soft. Three months ago, the common wisdom was quite the opposite -- the consumer wasn't spending, and retail was due for a fall.
Neither of these points matter much, although they do make nice soundbites. Investors can get into trouble simply by listening to such broad statements, much less applying them to a specific company that is already richly priced. A prime example here is Urban Outfitters (NASDAQ:URBN), which has performed tremendously the last few years but is now priced for perfection. If Urban Outfitters hiccups one quarter, investors who are just jumping into the company are going to wish they had slammed their fingers in a car door instead.
Foolish final words
I have a hunch why we investors are so tempted to think in the short term. After all, most gains in share prices tend to come over relatively short periods of time. It's easy to think you can grab those gains at just the right time, but it's impossible to execute such a strategy regularly.
I had this point driven home a little over a month ago, when I was manually rebuilding the performance of a few companies with dividends reinvested. At the time, I was curious about how strong the effect of dividend reinvesting was for these few firms.
However, along the way, I also noticed that the share prices at stable growers such as Wrigley (NYSE:WWY), Pfizer (NYSE:PFE) and Wal-Mart (NYSE:WMT) offer investors most of their return in spurts, interspersed with long periods of relative tranquility. This is also what makes reinvesting dividends, as well as dollar-cost averaging, such an effective strategy over the long term. It's also much easier to execute a strategy that allows you avoid all of the short-term noise in the world.
Curious about solid companies that allow you to build a long-term position by reinvesting dividends? Consider a free 30-day trial to Motley Fool Income Investor . There's no obligation to buy if you aren't completely happy.
Fool contributor Nathan Parmelee owns shares in FARO Technologies but has no financial interest in any of the companies mentioned. FARO Technologies is a Motley Fool Hidden Gems selection. You can view Nathan's profile here . The Motley Fool has an ironclad disclosure policy.
