Go home, ASX. You're drunk…

Days like these have only one rationale: emotion.

A young man in a blue suit sits on his desk cross-legged with his phone in his hand looking slightly crazed.

Image source: Getty Images

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Go home, ASX. You're drunk.

Frankly, I could have written that at many points in the last 6, 12 or even 18 months as shares ducked and weaved – lower – and been correct.

But I'm a shares guy. And people assume if I'm taking exception to share price falls, I'm just talking my book, or cheering for my side, or whatever.

I hope most of my readers know I'm a straight-shooter, but if you're new around here, I wouldn't blame you for thinking I could be as conflicted as the next guy or girl.

So… I waited until a day like yesterday (and, probably today) to say it: Go home, ASX. You're drunk.

Not literally, of course (though maybe there should be random breath testing on trading floors after lunch!)

But metaphorically.

A jump of 3.7%, like we saw on the ASX yesterday, is… not rational. 

(This chart was done before the market closed… and it went higher after that!)

Sure, some of you are thinking 'don't question it, Phillips. Just take the money!', and I can't blame you.

But if we cast an uncritical eye on the gains, we can get ourselves in all sorts of trouble.

We can become the sort of people who take credit for the good times, but blame others for the bad.

We can become people who think the only good outcomes are the ones we agree with, and everything else is a conspiracy.

You get the idea.

So while I'm always happy to see my portfolio grow in size (and doubly after the last 12 months or so of falling share prices, especially for growth companies), I want to keep balanced – and to help you do the same.

So, let's put a 3.7% gain in perspective.

Over the last 30 years, the ASX has gained an average of 9.0% per year.

In other words, in a single day, the ASX jumped by 41% of an average year's return.

(And when you consider that dividends are a large chunk of that 9% return, yesterday's jump probably represents well more than half of an average year's capital gain!)

Does it seem logical to you that such a one-day gain would make sense, in the cold light of day?

Me either.

And yes, falls of a similar magnitude are usually overdone, too!

Days like these have only one rationale: emotion.

Sometimes irrational exuberance.

Other times, irrational fear.

But irrational, in either case.

Because remember, a share price is – should be – the sum total of all future per-share cash flows, earned by a company, totalled up (and then discounted because $1 today is worth more than $1 in 20 years time, thanks to inflation and other things).

So, when JB Hi-Fi Limited (ASX: JBH)'s shares jumped 6% yesterday, that implies that the total future cash flows of that business are going to be 6% higher.

Not tomorrow. Not next week, next month or next year.


Now, forever is a long time.

So let's wind it back a little.

Last year, JB earned $5.50 per share in cash flow, according to CommSec.

Let's say it grows at a modest 5% per year, from here, over the next 10 years.

I'll save you the maths and just tell you that (without discounting it back) that's $96 over the next decade.

Does anyone really think that between 10am and 4pm yesterday, that jumped to $102?

That somehow, something happened yesterday that'll send 6% more people into one of their stores?

Yes, yes, the RBA raised by less than expected.

But the market was already up 2% by then.

And do you really reckon that anyone who placed a trade for JB Hi-Fi's shares yesterday can accurately predict what's going to happen to interest rates over the next 9 years and 11 months?

Me either.

So, yeah. A 3.7% move in a single day is almost always silly.

And it tells you more about the emotion of the market, than with the fundamentals of a business.

By all means, enjoy the good days. And bear with the bad days.

But don't fall into the trap of letting them tell you anything about the quality or valuation of those businesses!

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended JB Hi-Fi Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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