What is the right price?

It seems like restaurant food costs too much. It seems like too many people pay too much for not enough. In Ann Arbor, one bowl of chili can cost more than a week of chili would cost if I made it myself every day. That is too expensive, right?

Stock pickers tell us that some stocks cost too much. They tell us that too many people are irrationally buying up what they should leave alone. Just check your news feed. They have to know what they are talking about, right?

In the stock market, shares of companies are being bought and sold every day. If one person thinks the price of a stock is too high, they will sell it. And if someone else thinks it will cost more in the future, they will buy it. This exchange of ownership goes back and forth millions of times every second of every trading day. Hundreds of thousands of professionals worldwide search for new information about every publicly traded company and buy or sell it based on their judgement. Each buy or sell order from every trader incorporates all the knowledge that individual has about that company, as well as their instincts, emotions, and perceptions.

How does the restaurant market work? Each patron decides every time they go out whether to pay the price for the meal they want and whether to return next week. The price of restaurant food incorporates every past patron’s experiences, tastes, and desires. We can make the claim that as consumers with good taste, we are qualified to make judgments about restaurant food.

But are you (or is anyone) smarter and faster than all other traders currently examining a stock? The stock pickers say they are. The data says no one is. The truth is that stock prices move randomly, and that the best guess as to the value of a stock is its current trading price. The price incorporates all available information. This principle is called the Efficient Market Hypothesis.

Here is an ugly truth: no one can tell you whether the trading price of a stock is higher or lower than its real value; the current price of a stock is its current value.

Here is a beautiful truth: you do not need to know the price or forecast of any stocks in order to invest for the future. You need coaching.

A quick tip: never buy an initial public offering: zero trading history is incorporated into the price. This can be counter-intuitive when it comes to restaurants: once upon a time, some friends of mine went to a restaurant grand opening together and got free food. They told me later how good it was. Thanks, guys.

Simon Joshua is a licensed investment advisor representative at Cornerstone Wealth Partners in Michigan. He has structured his practice around investor coaching and committed himself to leading communities in establishing a legacy of fulfillment.

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