A random walk down the stock market - a case of coin tossing

I recently borrowed an audio book from the library titled "A Random Walk down Wall Street". The author stated an interesting hypothesis about the randomness of the stock market. He used the analogy of coin tosses. A mathematics professor in a lecture hall asked his students if he were to make 50 consecutive tosses of a coin, what will be the likely results of the coin tosses. Many students gave very similar answers of alternating heads and tails from the tosses. Answers given were likely to be, "Head, head, tail, tail, head, head,........." or "Head, tail, head, tail, head, tail,..........". Some answers were quite different as it consisted of a longer string of heads followed by some tails and heads again and tails again.

The professor after hearing all their answers told the class that they missed out something very important though most of their answers were correctly based on randomness of chance in coin tosses. He asked them whether is it likely to get all heads in the 50 tosses or all tails in the 50 tosses or maybe to a lesser extent almost a string of 40 heads followed by a string of 10 tails. The class hesitated for a while and finally a student broke the silence and said, "Yes, it is still possible. I did not think of that though."

As head and tail has equal chance of appearing each time, it is still mathematically possible to get all heads or all tails in all the 50 tosses in theory. Applying this analogy into the dynamics of the stock market, the author proposed that the stock market is certainly random similar to coin tosses. Stock prices can fluctuate within a range, or stock prices can climb and keep climbing higher and even keep climbing higher when one thinks the odds are against the prices which are already overvalued climbing higher. The same can happen to prices keep falling, and falling and even falling some more. Reversal in stock prices can also happen suddenly seen by the sharp rally from March until now. Even though many economists and analysts based the stock price movements on global macroeconomics or the business earnings forecast of a company, one can still see that the stock market is a random place where many market players are engaged in constant trading of securities.

Father of value investing, Benjamin Graham used a fictitious character "Mr Market" to depict the randomness of the stock market. Mr Market is really a moody character and at some days he will priced securities at higher prices and at other days at lower prices. One thing is certain, he will keep changing his moods almost everyday depicted by daily price movements of the stock market. I have already seasoned myself to view the stock market with such randomness long time back when I was starting my investing journey. As time goes by, I started to become more immune to price swings from the stock market. Now, I only look at valuations to decide when to buy, to hold or to sell. My view of investing is long term.

The stock market from decades past until now will keep on fluctuating in prices. One thing is certain. Each business that has excellent economics will have it's estimated intrinsic value. No investor in the right frame of mind will sell a business at undervalued prices unless during a sharp bear market. Let the stock market's moods change all it wants. As a focused value investor, I will gladly focus on buying good businesses that someone else is willing to sell me at ridiculously low price or sell a business that has exceeded it's intrinsic value by grossly overvaluations. It is still in my wildest dream that big names like SPH, Keppel Corp, DBS, OCBC, SembCorp, CDL, etc. will trade at below $1 per share. If that should happen, it is great news for value investors like me and others.

So, in a nutshell, my investing approach is based on a "firm foundation theory" that each businesses has it's own intrinsic value and my job is to seek out excellent businesses to invest in them at below what they are worth or to sell them at much higher than their intrinsic value (assuming the business I intend to sell has not much future growth).

Discussion points:- The stock market is not always efficient. Prices of stocks can be traded at ridiculous valuations at times. 

The stock market is also random. It may not always follow trends and can change suddenly. We have seen the roller-coaster effect of the randomness of the stock market so far in this year already.

As a value investor, the market fluctuations do not concern me except by providing investing opportunities at certain times (e.g. gross undervaluations or gross overvaluations). Other times, a value investor is patiently waiting (inactivity) to catch the most lucrative moments when such moments come along (not frequent but surely will come once in a while).