The Motley Fool

Pundits And Prices

G’day Foolish readers,

Where is the market headed?

It’s a question we get all the time, and understandably so.

After all, share prices change on a daily basis — often on a minute-to-minute basis — and seemingly without any rhyme or reason.

There’s no shortage of ‘experts’ in expensive suits explaining all the madness which, with the benefit of hindsight, all seems perfectly obvious (and if not, well, you can always hide your ignorance behind a wall of fancy jargon).

What is especially peculiar is that, although most seem to have all manner of forecasts for where things will head next, usually with the utmost certainty, they still have a need to work full time. Personally, I’d be using that ability to trade my way to riches! Maybe they are just nice guys who work to help the rest of us poor fools?

My personal favourite is the expert who uses the same phenomenon to explain the exact opposite outcome.

“The market is down today on the back of falling oil prices, with plummeting energy stocks dragging the wider market lower”. Or,

“The market rallied today on the back of falling oil prices, which will help to reduce consumer and corporate energy costs and increase disposable incomes.”

Take your pick.

Another great example is with interest rates.

Falling rates can push the market lower due to what it implies for the health of the wider economy. Conversely, cheaper interest can make stocks relatively more appealing and lower borrowing costs for corporations.

The secret is to say it with conviction, and make sure you are singing from the same hymn sheet as the other talking heads. If you are wrong, at least you won’t be singled out.

Still, we shouldn’t be too hard on the market pundits; they only give what is asked of them.

We, the punters, need to look in the mirror and question why it is we keep asking people with no credible track record what they think will happen next. If your mechanic or doctor repeatedly gave you a demonstrably flawed opinion, you’d quickly give them the flick. But with market pundits, we’ll keep asking them what they think no matter how many times they steer us wrong!

Sadly, memories are woefully short on the sharemarket.

And it’s not a question of incompetence either. The pundits aren’t wrong because they are idiots — often they are extremely intelligent and well-credentialed (albeit sometimes misguided). They are wrong because predicting the short term gyrations of markets is impossible. And when they are right it’s usually just luck — even a broken clock is right twice a day!

Why is it impossible to predict short term share prices?

Because prices are determined through the interaction of buyers and sellers. Fallible, emotional and (often) irrational people working with incomplete information, acting in different circumstances and with different goals. If a price rises on a particular day, it’s simply because buyers were more eager to transact than sellers. Period.

How can you hope to guess at what such an unwieldy mob will do day to day? You can’t. No one can.

Trouble is, any pundit that offers that explanation will soon find themselves out of a job.

So does that mean that the whole endeavour of investing in the sharemarket is a waste of time?

Well, speculating on short term share prices is as reckless as betting your savings on roulette, so in that regard, then yes!

But if your intention is buy quality companies, at sensible prices, and to hold them for many years, then the sharemarket will prove to be a wonderful tool for wealth creation. Historically, it is by far the best.

Although share prices move all over the place, and completely unpredictably in the short term, the long term investor can rely on a universal law of investing to help them stay the course. In the words of Warren Buffett, arguably the best investor of all time, “If the business does well, the stock eventually follows.”

It is an irrefutable statement of fact, and one supported by decades of evidence.

The trouble is, most people seem incapable of following this simple, yet powerful, principle. There are a few main reasons.

First, it isn’t always easy to know what businesses will do well over time. Some of the most promising prospects have fallen by the wayside, while some have beaten all expectations to become great successes.

Next, people tend to get distracted by the share price, and assume that its movement can act as some predictive tool.

Just look at vitamin powerhouse Blackmores (ASX:BKL). In a two week period between late June and early July this year, shares lost over 18% of their value. There was no news from the company — in fact, all things considered, business was booming! But many people wouldn’t have been able to stomach the ‘loss’. Many would’ve suspected that the price was a portent of bad news to come.

Since then, shares have climbed over 145% higher.

The other great problem people have is that they forget the ‘eventually’ part that Buffett refers to. Great businesses don’t see their share prices rise in a straight line. Sometimes, due to unrelated factors, or just short term business issues, shares can drop lower and remain in a funk for a long time.

People tend to expect instant gratification when it comes to sharemarket investing, and few have the patience to stick it out.

API (ASX:API) is a great example. I first purchased shares in November 2013, at 61c. Shares dropped 17% in the following week, and basically tracked sideways for nine long months (it felt like much longer!). Today they are worth $1.90, and have paid some great dividends along the way.

Sometimes, it just takes time for the market to recognise value.

The Foolish Bottom Line

Don’t let anyone tell you that you can reliably speculate on short term prices. If it was possible, those same people would be doing it. They certainly wouldn’t need to offer you the secret for a fee.

But if you plan to invest sensibly for the long term, the sharemarket is a great option. Just heed the words of the late, great Benjamin Graham:

“The investor’s chief problem — and even his worst enemy — is likely to be himself.”

Your focus needs to be the business, not the insanity of short term price fluctuations.

Your expectations must be realistic, the sharemarket is not for those looking to get rich quick.

And, you must have discipline and patience. Even the very best investments will often take some time to prove their worth.

If you think you have the right temperament, but need some help finding the right businesses, I’d urge you to consider Motley Fool Dividend Investor — the service I run for long term, income focused investors.

Each month we bring our members a new investment idea, as well as a host of Foolish education and practical commentary. I reckon we’ve done a great job to date; something that is supported by a market beating track-record.

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