THE MARKET MECHANISM
A price is
an agreement.
Every trade brings together a buyer who sees more value and a seller who prefers the cash. The market price is simply the latest point at which they agreed — not a permanent statement of what the business is worth.
FOUR FORCES
The business is only
one part of the move.
Business results
Revenue, margins, cash flow and returns on capital change the economic value of the business.
Expectations
A good result can disappoint when investors expected something even better.
Discount rates
Higher interest rates reduce the present value investors place on future cash flows.
Supply and demand
Flows, fear and enthusiasm can move prices away from business value in the short term.
THE EXPECTATIONS TEST
Good news can
send a share lower.
The market does not compare a result with zero. It compares the result with the expectations already embedded in the price. Move the controls to see the difference.
Reality beat expectations.
The result was stronger than the market had priced in. All else equal, that can support a higher share price.
THE GOOD-COMPANY TRAP
A great company
can be a poor investment.
The business is excellent.
Investors already expect perfection.
Results are good, but not exceptional.
Expectations fall — and so does the price.
Quality tells us what we may want to own. Valuation tells us what success is already priced in.
TIME CHANGES THE ANSWER
Price and value can separate.
Not forever.
Flows and emotion
News, positioning and market liquidity can dominate.
Changing expectations
Results and guidance force investors to revise their forecasts.
Business economics
Cash generation, reinvestment and returns on capital become decisive.
THE MITUXA RULE
Do not ask only whether the company is doing well.
Ask what the price already assumes.
The investment opportunity appears when business reality can become better than the expectations embedded in the share price.