How Does Stock Market Manipulation Work?
Topics: stock market newsletter, financial investing, stock market, market manipulation
How Do you separate stock market manipulation versus normal stock market movement?
To answer this question, we must define the two types of returns that investors may receive:
* Investment Return (earnings growth + dividend yields)
* Market Return (earnings growth + dividend growth + speculative return)
The difference between the two is speculative return, which is responsible for unpredictable short term movements within the stock market.
Most of the time, speculative return relies on changes in a stock’s Price to Earnings ratio (P/E ratio), or simply the price of a stock divided by its earnings per share over the last 12 months.
Understanding the difference between investment return and market return will allow you to understand why the stock market may jump up 100 points or down 100 points within days, yet continue to rise over the long term.
Historical Dow Jones Charts
If you looked at a chart covering the Dow Jones Industrial Average over a hundred year period, you would notice something very interesting. Even though there are peaks and valleys, the long term trend is upwards.
As you can see from the Historical Dow Jones chart between 1900 and 2006, the stock market rises over the long term, period.
That’s because the earnings of America’s corporations rise in the long term, thus reflected by the rising stock prices. The same principle applies to the stocks of foreign companies as well.
How to Avoid Manipulation and Invest for Long Term Growth
Don’t think of your stocks as numbers on a trading screen, but as shares of a real life company. If the business does well over the long term, then your shares will rise in value. On the other hand, if the company performs poorly, then the stock price shall decline over the long term.
Remember that a stock price can be manipulated over the short term by: rosy analyst recommendations, one-time profitable events, and overanxious speculators.
However, over the long term, a company’s earnings cannot lie, and its business gains will match the aggregate gains made by shareholders.
The best way to buy a great business is to buy something you love. Look in your own household for great products then check out the company itself. The best companies out there rarely deal with market manipulation; it’s the penny stock and small start-ups that cost greedy investors a fortune.
Recent Stock Market Correction Presents an Opportunity
Things to look for in a company include: companies that you are familiar with, companies that create tons of free cash flow, companies with products that don’t require much change in the future, and companies that own a piece of the customer’s mind, which creates a wide moat around the business.
So use the recent 2008 correction as an opportunity to buy those wonderful companies that were so expensive for the past 8 years.
Tarik Pierce writes regularly for Investor Trip and publishes a bi-weekly newsletter on global investing called “Global Market Insights” where he discusses global trends that investors can learn and profit from.
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