Page 161 - Psychology of Money - Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)
P. 161
It’s too complicated a subject for simple answers.
COBACOBA
But let me propose one reason they happen that both goes overlooked and
applies to you personally: Investors often innocently take cues from other
investors who are playing a different game than they are.
An idea exists in finance that seems innocent but has done incalculable
damage.
It’s the notion that assets have one rational price in a world where investors
have different goals and time horizons.
Ask yourself: How much should you pay for Google stock today?
The answer depends on who “you” are.
Do you have a 30-year time horizon? Then the smart price to pay involves a
sober analysis of Google’s discounted cash flows over the next 30 years.
Are you looking to cash out within 10 years? Then the price to pay can be
figured out by an analysis of the tech industry’s potential over the next
decade and whether Google management can execute on its vision.
Are you looking to sell within a year? Then pay attention to Google’s
current product sales cycles and whether we’ll have a bear market.
Are you a day trader? Then the smart price to pay is “who cares?” because
you’re just trying to squeeze a few bucks out of whatever happens between
now and lunchtime, which can be accomplished at any price.
When investors have different goals and time horizons—and they do in
every asset class—prices that look ridiculous to one person can make sense
to another, because the factors those investors pay attention to are different.
Take the dot-com bubble in the 1990s.
