I want to tell you the story of a company.
Well, a company’s share price, actually.
(I could have said ‘the story of a stock’, but our monkey brains do better being reminded that it’s a real company, rather than letting it take the shortcut to a three-letter ticker code and a share price chart.)
This company’s shares are down 3% as I type this.
Here’s the story of the share price, by year:
In 2015, the shares went up 8%
In 2016, they fell 11%.
A good year in 2017, with the share price rising 45%.
In 2018, shares rose 7%.
Overall, pretty decent.
A 50% rise in 4 years. Around 11% per year, compounded.
About average, at market level.
Here’s some more information, though: during those four years, the shares lost at least a third of their value on three different occasions.
Many investors would have actually lost money, had they bought at certain times during 2017 and 2018.
And if you’d bought in 2015, at a peak, you made barely 20% over the following 3.5 years.
Not a loss, but not much gain for your trouble.
Remember: Timeframes matter when looking at share price returns. And they can be fickle.
Here’s what the share price chart looked like (courtesy of Yahoo Finance):
Overall, the company’s returns were okay. Decent. Reasonable.
If you’d held for the full four years.
If you’d bought it at the wrong time, they were disappointing. Loss-making even.
A dud investment.
You’d be excused for wanting to sell.
Many people did.
After all, the trend is your friend, right?
No-one wants losers in their portfolio, right?
We want shares that are going somewhere.
Making money for us.
So let’s extend the lens.
But, well, rather than write about it, let me show you, first.
As you might see in the top left corner of the chart, the company is Tesla Inc (NASDAQ: TSLA).
The shares, in mid-2021, are up 10-fold on their December 2018 price.
And that’s the case even though shares are down more than 30% from their highs, earlier this year.
It sits squarely in my ‘too hard’ pile.
And yes, this is a story told with the full benefit of hindsight.
Not only that but there are companies whose share prices fall and never recover.
The world of investing, unfortunately, doesn’t offer perfect information — or easy wins.
Instead, this go-go stock is a reminder of some old-world principles that remain true.
First: Share prices are a result of sentiment in the short term, not business fundamentals
Second: Sentiment can change on a dime. Then change back again. And again. And again.
Third: The market should be your servant, not your master. Don’t let it tell you what to think.
Fourth: The corollary: Sometimes, the market is right. Don’t let arrogance blind you to reality.
Fifth: Just as 2015 – 2018 was an arbitrary time period, so are the last 5 years. So is today. No company has reached its ‘final’ share price today, June 9, 2021. The end of the story hasn’t been written, so don’t rest on your laurels, or wallow in your pity.
Remember, Dick Smith shares fell and kept falling.
So — thus far at least — have AMP Ltd (ASX: AMP)’s.
Tesla’s has gone up — a lot — over 5 years, but is down in 2021.
Sometimes, we’ll be right. Sometimes we’ll be wrong. No investor gets to hand in a clean sheet.
If I was a betting man, I’d guess Tesla’s share price remains volatile.
And, in the fullness of time, will reflect the company’s ability to sell an ever-larger number of cars (and batteries and solar panels) at the prevailing margin.
Let’s widen the lens:
Was the market right in March 2020, as it rang in a 38% fall in just over a month.
(And that’s not ‘Monday morning quarterbacking’ — I said so at the time.)
Is it right now?
That’s a harder question.
And not just from the ‘doom-and-gloom brigade who (always) think a crash is around the corner.
Maybe it crashes.
Maybe it goes up another 25% in 2021.
Or — more likely — somewhere in between.
I hope my Tesla example has shown you the better path.
Your job, as an investor, is not to guess whether we’re at a top.
It’s not to guess whether it’s going up, or down, over the next day, week, month or even year.
It’s to look at businesses and decide whether today’s price is attractive, relative to the long term potential of the company itself.
If you bought Tesla shares at $77 in mid-2017, you were feeling pretty glum when they were selling for $60 on Christmas Eve in 2018.
But if you’d held your nerve…
If you’d focused on why you bought the shares…
If you’d invested for the long term…
(And assuming your thesis remained intact, throughout…)
… you’d be sitting on a very, very tidy profit, not quite four years after your purchase, now that shares are changing hands for more than $600 each.
That is more important than market timing.
That is more important than trying to pick market ‘tops’ and ‘bottoms’.
That is more important than letting the market tell you what to think.
That is more important than trading impatiently.
That… is investing.