The price of your stocks increases in only 2 ways:
The first way is earnings growth; the company earns more money. If a company earns one dollar per share, and the price-to-earnings ratio is 10, then the stock price is 10 dollars.
If earnings rise to 2 dollars, and the ratio remains the same, then the stock price will increase to 20 dollars – nothing magical happened here.
The business improved.
The second way is multiple expansion – earnings can remain the same, increase, or even decrease, but investors decide that this business deserves a higher valuation.
Sometimes this is because the future outlook has improved, and sometimes it's due to optimism or fantasies.
Usually, it's a combination of all these, but in any case, the stock price rises – so the reason is less important.
Multiple expansion is interesting, but not stable,
It depends on the narrative, the atmosphere, and public sentiment. In contrast, earnings growth is boring, measurable, and slow.
The best investment is one that holds both options – buying a business at a low multiple, and over time, earnings grow significantly.
When the business proves itself, investors are willing to pay a higher multiple,
Chris Mayer calls this the 'two engines' – earnings growth and multiple expansion.
When these two engines work together, the return can be amazing.
The third engine that almost no one talks about is 'time'.
Time allows a business to grow realistically, even when the stock price doesn't move, gets stuck in a certain range, or even declines.
Time makes people impatient, forcing them to exit the market just before the situation becomes interesting. The market doesn't reward patience every day, but only eventually.
Because of this, the stock price can remain static for years, even though the business continues to improve.
For most people, this looks like a failure – but for a long-term investor, it's simply 'preparation'.
I don't look much at the stock price. Even if the stock price rises from 15 dollars to 20 dollars tomorrow, it won't change much for me – stock price fluctuations tell me almost nothing, but business improvements tell me almost everything.
Most investors lose money not because they are wrong – but because they cannot tolerate boredom.
They cannot tolerate inactivity, and they need constant movement to feel like they are making progress.
If you need the stock to only move upwards to maintain your confidence in a position – this is where you are wrong.
Because you have gone from controlling to being controlled,
And now – the market is controlling you, and when the market controls you – it will crush you mercilessly.