Is It Time To Worry About Your Investments Now?

Investment Perspective – September 2020

Peter Flannery CFP AFA

 

 

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

Beware the Market Trick

The above image assumes a hypothetical $10,000 investment in the S&P 500 index on each of those days outlined above.

THAT … trick, is the market making a noise … you and I become consumed by it; making investment decisions with less than ideal clarity – not always with a good outcome. 

But surely, it is wise to take into account market conditions!? 

Well yes, but we need to be a bit discerning about what we ‘buy into’. 

The events outlined in the image above are notable but only a few of a bigger number of significant events that have unfolded over the last 100 years that have impacted market prices in a meaningful way. 

The markets, of course, are all about the trading price of assets.  The news that floats around the popular media, including the internet has an impact, either positive or negative on the trading prices of all of the businesses within the portfolio that you own. 

In this month’s market and economic update, I highlight the fact that only five of the companies listed on the S&P 500 index are doing most of the heavy lifting and are significantly responsible for the strong recovery in trading prices across the whole index. 

Get this … nearly half of all companies on the S&P 500 are behind where they were two years ago! 

Five companies are responsible for the whole index rise, nearly half of all companies on the S&P 500 are behind where they were two years ago! How is that for a market trick?  

 

The Point

The point here is that want to be careful about what we believe with regard to market news. 

I am not referring to conspiracy theories or weird stuff that goes on.  I am referring to just the day to day banter that goes on across the markets.  It sounds like news and is sometimes presented as ‘information’. 

For example, many people have worried about Donald Trump and yet from an economic and market perspective, he has actually been positive – another market trick. 

It can seem that when we watch the way he behaves (by some measures he could be considered to be neurotic, with possible mental health issues), that the United States economy could soon be collapsing. 

Donald Trump is not singlehandedly responsible for the increase in debt and other struggles that the US economy faces.  Sure, we can argue his mishandling of the Coronavirus and other matters is not helping. 

The point … worrying about Donald Trump, the American economy or global debt is another market trick to be aware of. 

 

The Reason Is Because …

The reason we need to be careful about what adjustments we make with our money and the decisions that we make about our investments based on market noise is because, the noise affects market prices but does not always affect the underlying fundamentals of the businesses in which we invest. 

You know the old story, price and value are not the same thing. 

That is because the value of the companies in which you invest is determined by the performance of the underlying business.  We can measure that by looking at the return on shareholders’ funds, the return on capital.  Of course, we also need to take into account the economics of the business, along with other factors … a far distance from just watching the trading price.

To be clear, at times ‘the noise’ can be very loud and confronting.  Humans are wired up, still, for fight or flight.  In other words, in simple terms, we worry too much sometimes about things that actually, as valid as they may seem, are not a concern for us as value/eco-Investors. 

Evidence of this is at the top of this page in that image showing significant events that caught the world’s attention and yet, as time moved on and markets continue to unfold, those events actually provided opportunity for investors.  Lower prices meant better buying with each and every event – as it always does.

 

Some Market Noise Worth Listening To

In my view, most of the market banter that you and I are exposed to has little bearing on investment decision making. 

Worth listening to though is news about events that could cause the fundamentals of a business to be altered significantly. 

For example, the US Justice Department appears to be pushing ahead with the competition lawsuit against Alphabet and has been preparing their case for some time against the company.

The Justice Department has delayed taking it to the courts in order to strengthen their position. 

The Justice Department will allege that Google illegally abuses its market dominance with its search engine, by favouring its own products such as YouTube. 

There was an investigation in 2013; however, that found no justification for the claim at that time. 

Anyway, obviously I am watching with interest but the point here is that if you worry about this type of event, you may start to wonder whether we should be quickly selling out of Alphabet before the price drops? 

Well, if the price dropping bothers you, then we probably should be talking about your investment risk preferences and your tolerance/understanding of pricing volatility. 

If we look at what happened to Microsoft over a decade ago, the company was broken up but this did not mean that Microsoft was irreparably damaged.  It did mean that there was the so-called lost decade for investors, whereby the trading price did not surge on a daily basis and was flat for quite some time.

The bottom line is that, because we invest in the business and do not play the stock market, we will take a measured view about any reaction to antitrust attacks on Alphabet. 

What the Justice Department in the US does not like is the fact that Google controls about 90% of web searches worldwide and of course, is the dominant player in online search advertising, controlling more than 70% of the market by some measures.  That is what we like about it! 

 

So …

Having read all this, you may not feel any better for it, I imagine!  Don’t worry …

I am focused on the business that you invest in and the underlying business economics. 

The financials, remember, report results and do not drive outcomes. 

The economics of the business drives the outcomes that are reported by way of the financials.

Oh by the way, did I mention not to worry …

 

It is like no one in my family appreciates that I stayed up all night overthinking for them.” 

                                                                                                                     Mom

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