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How Supply and Demand Drives Stock Prices | Ken Fisher | Fisher Investments UK [2019]

How Supply and Demand Drives Stock Prices | Ken Fisher | Fisher Investments UK [2019]


Supply and demand movements’
impact on stocks is one of the hardest things
for people to understand. They operate very differently. We all know from the days
we took economics in school that prices of things are supposed to be
impacted and driven by shifts in supply and demand. But those little curves
that they drew you in school aren’t the way they work
in capital markets. Capital markets are nonlinear and there’s a lot of
funny little qualities. But let me just take a second. Demand is about eagerness to own. And that’s about humanness. And demand bounces around within
a fairly tight bandwidth pretty rapidly. People move from being very optimistic
to pessimistic back and forth pretty quickly. News shakes ’em, feelings shake ’em,
the flu shakes ’em. When we all get too optimistic
or too pessimistic, either one, for too long,
we fatigue at that ’cause it takes energy
to get away from our normal levels
of optimism or pessimism, and then we tend to revert back
to the mean. So there’s this relatively rapid
moving thing that moves too high, too low,
bounces around, and pushes prices in the short term off of any reason, no reason, crazy reasons. Supply is this other thing
that’s, in the long term, more powerful and more linked
to economics. And when it’s in the company’s interest
to buy back stock and destroy it, because that increases
their earnings per share, they’ll do that. When it’s in companies’ interests
to create new stock, supply, they’ll do that.
But it takes longer because there’s a regulatory process and there’s a marketing process and they’re not sure they’ll succeed. So they get more eager
to create supply, but that eagerness has to be extended
over a longer time period. In the long term, supply can overwhelm any demand because demand bounces around
on a fairly tight bandwidth, but rapidly. Supply moves slowly,
but nearly infinitely. It can overwhelm any amount of demand, whether it’s overly high demand
or overly low demand. So, in the short term, demand impacts
what happens to stock wiggles. In the long term,
it’s supply. This is very parallel
to Warren Buffett’s famous line that in the short term,
stocks are a voting machine– sentiment– and in the long term,
they’re a weighing machine– supply. So, when you think about stock movements
in the short term, think demand. When you think about them
in the long term, think supply.

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