We’re In It For The Beer!

Great analogy For Trading vs. Investing.

Imagine you crack open a bottle of your favourite brew and pour it into a nice chilled glass.

If you’ve done this before you know that if you carefully pour it down the side you’ll wind up with a glass filled mostly with beer and a small foam head. Pour it fast and down the center and you can easily have a glass with a little beer filled mostly with foam.

Imagine now someone else has poured it for you, out of sight, and into a dark mug you can’t see through. You have no way of knowing how much is beer and how much is foam. That’s the Stock Market.

See, the stock market is really two related but very different things:

It is the beer:

The actual operating businesses of which we can own a part.

It is the foam:

The traded pieces of paper that furiously rise and fall in price from moment-to-moment. This is the market of CNBC and the daily stock market report. This is the market people are talking about when they compare Dalal Street to Goa. This is the market of the daily, weekly, monthly and yearly volatility that drives the average investor out the window and onto the ledge. This is the market that, if you are smart and want to build wealth over time, you will absolutely ignore.

When you look at the daily price of a given stock, it is very hard to know how much is foam. This is why a company can plummet in value one day, and soar the next. This is why CNBC routinely features experts, each impressively credentialed, confidently predicting where the market is going next—while consistently contradicting each other. It is all those traders competing to guess how much beer and how much foam is actually in the glass at any particular moment.

While this makes for great drama and television, for our purposes it is only the beer that matters. It is the beer that is the real operating money making underlying businesses, beneath all that foam and froth, that over time drives the market ever higher.

Understand too, that what the media wants from these commentators is drama. Nobody is going to sit glued to their TV while some rational person talks about long-term investing.

But it’s all just so much foam, fluff and noise. It doesn’t matter to us. We’re in it for the beer!