A sole focus on short-term results can lead to poor decisions that destroy investors’ wealth. However, it can also create valuable investment opportunities.
The market’s reaction to a negative event or development is frequently focused on the short-term impact to earnings. Often, the bigger picture is overlooked and investors can forget that the value of a stock is predominantly determined by its long-term prospects.
This focus on the short term can generate a lot of ‘noise’, leading to an overreaction by the market and sharp price falls. These short-term share price declines frequently represent buying opportunities for Investors with an in-depth understanding of a company’s fundamentals and its industry. The true test typically comes during reporting season as companies can report earnings that the market can properly evaluate.
An example could be the market’s reaction to the imminent arrival of Amazon in Australia. In recent months, the risks posed by the online shopping behemoth to local retailers have dominated commentary about the retail sector and generated fear among investors. In response to the perceived threats created by Amazon’s arrival, Australian retail stocks have been significantly and negatively impacted. The market’s reaction has occurred in the absence of details about Amazon’s proposed presence in Australia and, as a result, the specific impacts on the retail sector cannot be quantified.
To gain a 24 hour free pass to The Constant Investor click here.