Good companies attract investors

Our economy is based on the fact that good companies attract lenders and stock holders. The lenders are confident of receiving a full payback plus interest. The stockholders are confident of earning future capital gains. More stock buyers are attracted as the company grows in value and profitability. These buyers are called ‘growth’ investors.

corollary 1. If good companies fail to attract investors, the stock price will fall. Bargain hunters then wait for the stock price to approach historically low values (“fire sale”) to scoop up shares for a potentially large capital gain. The bargain hunter is a ‘value’ investor.

corollary 2. Bad companies may attract investors when stock market participants are in a euphoric mood. For example, frenzied investors bought shares of technology companies that were selling unproven products during the 2001 dot com crisis. Those investors who sold out at the right time made fortunes and those who held shares lost fortunes when the market crashed.

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