On any given day in the markets . . .

Richard C. Taylor had a saying that "On any given day, one percent of the owners of a stock set the price for all the other owners."

He was advising owners of shares in good businesses not to become flustered by the market moves of their stocks in the short term, because those moves are driven, on any given day, by only a very small percentage of the total ownership base of those businesses.

Too many investors view "The Market" as the final say on what a business is worth from day to day: all those other shareholders out there "must know something" -- the implication being "they must know more than you do!" Financial media coverage tends to reinforce this perception. So does modern portfolio theory and its efficient market hypothesis, which we have discussed in this previous post.

Instead, investors should realize that even on days with exceptionally heavy volume, only a very small percentage of shareholders in any given issue actually trade their shares. Thus, only a small percentage are speaking for everyone else on any given day, and what that small percentage says about the value of the business should be viewed as the opinion of a very small minority.

For example, comparing the average daily volume of shares traded over the past three months and dividing that by the total shares outstanding listed in the most recent annual reports filed with the SEC for ten different well-known public companies, the average percentage traded per day was 1.67%. So, we could be a little more precise and say that "On any given day, about 1.67% of the shareholders of a company set the price for everyone else." But the general point is very important for investors to understand.

It is also important to realize that during periods of lower volume, even fewer voters than usual get to set the price for the stock. We have previously stated that lower volumes (which are typical of the upcoming summer months) will probably keep the markets fairly volatile but indecisive until this fall and the November elections, when greater certainty will bring greater volume to bear.

The important takeaway from this insightful saying of Mr. Taylor's is that those who believe in the importance of owning businesses should focus more on what those businesses are doing and saying, and less on the distraction of the markets, which function on a daily basis as a kind of "Greek chorus" of commentators who may have some valuable points, but who make up a tiny slice (a hundredth or two) of the total community.

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