You've probably seen seminal stock market movie, Wall Street — the movie that bought us Gordon Gekko.
And even if you haven't seen the movie, you've almost certainly heard Gekko's catchphrase — the somewhat misquoted 'Greed is good!'.
Sensationalism sells, so it's no wonder that Hollywood tends to focus on only the less savoury elements of the sharemarket, and the media's focus on attracting eyeballs means that stories emphasising greed and fear usually win out over more informative coverage.
It makes great copy, but it's not great investment advice. You certainly won't see us investing that way at Motley Fool Dividend Investor!
So let's avoid all the baggage associated with the share market, and instead use a simple analogy.
Consider, if you will, that I present you with a magic money box. Once every year, it spits out some cold, hard cash. Moreover, the amount of money it dispenses has tended to increase over time.
If you owned this wondrous item, at what price would you consider selling it?
You could get technical, and employ any number of fancy valuation techniques — and that's not a terrible starting point. But, at any rate, if you owned this thing, I bet you'd be reluctant to let it go — especially if it continued to dispense ever increasing amounts of money.
For most of the year, you'd probably spend little time thinking about it — you'd just work out how much you'd sell it for… then set and forget!
But what if word of your money box got out? What if, every day, people came to your door and made you an offer to buy it off you?
No doubt, on some days, the offers you receive would be insulting. You would promptly slam the door in the face of someone that offered you an unrealistic price — and rightly so. Only if the offer was extremely attractive would you even consider selling, and even then there would likely be some reluctance. At any rate, most of the time, these daily quotes would be a real nuisance.
You can probably see where I'm going.
Though magic money boxes don't exist, there are investments that are just as good; quality, dividend paying shares. Shares in companies that, as reliable as clockwork, dispense ever-increasing sums of money into your bank account.
Companies like our latest Motley Fool Dividend Investor recommendation, which over the past 5 years has increased its distributions, on average, by more than 10% per annum.
But here's the thing — because shares in these companies are traded every day, and because there is a readily available quoted price, investors tend to lose sight of the actual company, and instead focus on the price. Moreover, the market price starts to be used as a source of information — would you let a potential buyer tell you how much your house was worth?
It's easy to be misled. Instead of judging value by the earnings potential of the business, many investors instead look for trends in price. Reason and objectivity are replaced by a sort of mob-rule, and a sense of urgency to act.
It's insane.
Even the most level-headed of investors will find it a distraction that is tough to ignore.
But ignore it we must!
The share price matters only at times when we are considering buying or selling. At most times, there will be no compulsion to act, and indeed inaction is likely the best course of action 99% of the time… or more!
If the price is compelling — then you should buy.
If someone's offering you a price that's too good to be true — you should consider selling.
But for the true investor, the value of a company comes from its ability, or potential, to deliver you cold hard cash. Not what others may be prepared to pay you for it.
Magic money boxes (sadly) don't exist. But if you can think of shares as cash generating machines, and value them accordingly, you'll have a massive advantage over most!
