One of the lessons I remember from my Dad in my early days starting in the Wealth Management business was that the market moves based on fear and greed. Fear takes the stock market lower while greed will take it higher. This lesson stuck with me so much that I remember taking that lesson into one of my University finance classes where my professor on the first day of class promptly asked, “what moves the markets?” I remember feeling overly confident in that moment as I felt that surely none of my fellow classmates would know the answer to this trick question. I promptly raised my hand and responded to Professor Zheng’s question with of course, “Fear and Greed Sir.” Apparently, professor Zheng was looking for something a little more academic. But this didn’t mean that my Dad was wrong, in fact in my opinion he hit it bang on.
I have been reminded of this lesson many times in my career as I have watched the stock market move day over day, month over month, and year over year. When you have studied investing as much as my team and I have, combined with our experience you realize that there is almost no logical reason for short term movement in the markets or in individual stock prices. In the short-term, pricing changes are not guided by fundamentals but more on human emotion. I recently came across an article online where the author did a great job articulating this exact point. In his article the author referenced the Roman philosopher, Seneca, who said that “Time discovers truth”. Although Seneca was not talking about the stock market, he easily could have been, because in the short run pricing is basically random, but in the long run the stock price will reflect a company’s true value (its intrinsic value). He goes on to illustrate the following example:
Many people talk about how they wish they had invested in this when its price was that, and so on. Well let’s pretend that you were smart enough to have invested in what is today’s largest company, Microsoft, back in the year 1992. Given what we all know of Microsoft today this would have been a brilliant decision and your investment would have paid off handsomely. But it wasn’t a straight up line. In August of 1993 your investment in the software company was not looking so good and your shares were down approximately 25% in less than a year. What’s worse is that it would have taken you 18 months before you even broke even on this investment, May 1994 to be exact. If you had the fortitude and discipline to continue to hold Microsoft for the next 30 years this likely was the best investment you ever made, but the unfortunate reality is that most investors never would have made it past 18 months and would have lost money on Microsoft.
Over the last few months investors have been reminded about what volatility really is in the stock market, it’s something we haven’t seen in a while. It should remind all investors that in the short run the market doesn’t care whether you own a Microsoft or whether you own a Bre-X as it is a complex system with very few interdependencies between decisions and outcomes… in the short term. In the short-term stock prices are driven by thousands of individual variables most of which are not important or even relative to the true value of the asset you are buying. Over this time period there is no correlation between good decisions and results. Therefore it is so critical to know yourself and to know your limits for volatility, because a good decision to buy a quality asset can quickly become a bad decision if your personality forces you to sell it in the short term. Your portfolio must reflect you and your ability to stay committed to your good decisions. As the author of the article I came across reminded me, Time discovers truth.
-Grant White, CIM®, CFP®
Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.