It’s easy to get distracted by daily price changes. Over time, though, share prices tend to follow the strength of the business behind them.
Share Prices Reflect Business Fundamentals
When you invest in shares, it’s easy to get distracted by daily price changes. But over time, share prices follow the business behind them. It may not move in a straight line, because emotions and market sentiment affect supply and demand. Still, the long-term trend always reflects the strength of the company.
A good business makes profits, and these profits build up as cash or are used to buy other assets. This growth adds to the company’s value. Over time, the share price usually matches the net assets and real value (intrinsic value) of the business.
Why Prices Go Above or Below Value
Because people act on fear or greed, share prices often move above or below what the business is really worth. When the price falls below its value, this creates a buying opportunity. Eventually, the market corrects itself, and the share price returns to reflect the company’s assets and profits.
Time Matters More Than Timing
Investing is not about guessing the right moment to buy or sell—it’s about time in the market. So what you are buying is not just shares, but time. Time allows the ups and downs of human emotion to settle. If the company is growing sales and profits, and the share price is lower than its value, then buying and waiting can pay off.
But remember: a company must have sales and profit growth. Without growth, the value of the business does not rise, and the share price will not increase no matter how long you wait.
Don’t Forget Diversification
Even with good companies, there is always risk. That’s why diversification is important. Spreading your money across different businesses and industries helps protect your investment.
Key Takeaway
In the long run, share prices follow business fundamentals. Focus on companies with steady profits, growing sales, and strong assets. Buy when the price is below value, hold patiently, and let time work for you. Combine this with diversification, and you build a stronger chance of success.
- Focus on earnings, sales growth, and asset strength.
- Buy when price < intrinsic value.
- Hold patiently—let time do the work.
- Diversify across businesses and industries.
About Chan & Naylor
Since 1990, Chan & Naylor has partnered with business owners and property investors in managing their taxes and building tax-effective wealth. Choosing Chan & Naylor means you’re not just selecting a service provider; you’re gaining a partner aligned with your financial goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business and property tax.
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
