What is the most important in the stock market?

Today Amazon joined Apple to be the second $1tn dollar company. Meanwhile, the electric car maker, Tesla, suffered a 4% drop in its share price, following Goldman Sachs maintain Tesla’s Sell rating at $210. Amazon and Tesla actually have some similarity. When Amazon first appeared in the stock market and showed its increasing debt level, investors were not very confident in investing in this stock, even now Amazon is still one the most shorted companies around the world. Tesla is still at its growing stage, and its market value is very high comparing with the market values of the traditional players in the auto industry; therefore, it is not surprising to see so many investors are shorting Tesla’s shares.The market does react to stories, when Elon Musk or any other company leader is telling a good story, the market will react to it and push the company’s share price higher; and vice versa. In some ways, investors could have more imagination than these companies’ leaders, even including the legendary Steve Jobs. When investors are making imagination to make expectations about a company, they can go very far and build a super glamorous picture that even the company’s leader is not capable of imagining; once this occurs, an overestimation about the company’s value appears. However, on the other hand, if investors’ imaginations cannot match the company’s leader’s imagination and capability, then they will underestimate the company’s value. Therefore, valuation is like investors receive a story from a company and use their own imagination to create more in this story then use the amended story as their investment guideline.

This may teach companies about how to be successful in the stock market. There have been some stories about some small cap companies are operating fantastic businesses and making good revenues but their share prices hardly increase. This is because no one pays attention to their stories so their companies’ values are not recognised by the market. Therefore, for a company to succeed in the stock market, the company has to draw people’s attention and tell good stories and make people believe their good stores will be continuously delivered (not only by making good revenues and paying good dividends, but also delivers the story about a “bright future”).