We are in the summer season and for many people it is a time to go outside and hopefully you will go to a park or nature setting. It is good to be surrounded by nature and eventually you can see some laws of nature.
In an article by Sam Sivarajan, he relates some of the laws of nature to investing in the stock market. They may help you understand what is going on in the stock market.
The law of gravity says what goes up must come down. If you had invested in Cisco in March 2000 the company was worth $465 billion, 22 years later it is worth $200 billion, unfortunately although a good company you would still be waiting to get your money back. Lesson – investor expectations drive stock prices, but future stock earnings must justify its price.
The law that water finds its own level, whether poured into a glass or rushing down a mountain side, water determines its own equilibrium over time. Generally a good stock is a good stock over time, a bad stock will eventually fall based on fundamentals, revenue, earnings and cash flow.
The law of conservation of energy says that energy is neither created nor destroyed, but simply converted from one form or another. Not every sector will be popular, markets tend to have rotation.
The laws of motion dictate that greater force is required to turn an oil tanker 90 degrees than a tugboat. The larger a company becomes the harder it is is to achieve growth, consider Apple in 2007 it was worth $175 billion and sold 1.36 iPhones for sales of $120 million. In 2021, Apple was worth close to $3 trillion sold 242 million iPhones for sales of $196 billion. What does it have to do to achieve more growth, invent a new product line that sells similar to the iPhone.
The law of mathematics reminds us to be wary of percentages and the bases in which they are applied. If you bought a stock at its high and the market corrected, the stock falls simple math tells us, in order to break even you need a much higher gain. Does it happen, sometimes mergers and acquisitions work.
The nature of human behavior suggests that we all tend to believe this time it will be different. We all believe that after a disaster officials have done something so the problem will not happen again, we tend to be wrong. People build on floodplain because of the great view, a once in a lifetime flood happens and we rebuild because it was once in a lifetime and it should not happen again.
Linking to dividend paying stocks, ideally the dividends you are getting allow you to take holidays into nature and you can learn while you are there. What trees have endured over a long period of time? how does the water flow? if you consider taking the same approach to investing you might say profitable companies that pay dividends are a good thing to own.
There are more questions than answers, till the next time – to raising questions.