Imagine someone ringing your doorbell every minute from 9:30 a.m. until 4:00 p.m., Monday through Friday, to tell you a price they would pay for your house even though it was not for sale. Would you sell?
Would you sell if each time you opened the door they offered you less and less? Obviously not — that would be irrational because you know the true value of your house. The same applies to stocks of quality companies — they have value despite their daily price movements.
Economic Worth of A Business
However, investors often perceive “value” in the stock market as “price” and forget the economic worth of the business attached to the stock. During selloffs, markets can drop because of uncontrollable factors that are not purely economic in nature, despite sound company-level fundamentals. Many perceive this day-to-day volatility as “risk,” but you certainly wouldn’t consider daily price movements as risk to your home’s long-term value. Perhaps the long-term view that real estate investors often take could be a good lesson for stock investors.
Similar to your home, companies have actual economic value despite their stock price on any given day. They are not just pieces of paper or a blip on the computer screen. We favor quality U.S. businesses and, ultimately, a stock’s performance depends upon the underlying company’s ability to grow economically — not how the market prices its stock on a daily basis.
Time in the Market, Not Market Timing
Investors often let their emotions get in the way of rational decision making. They become fearful and sell when they should buy. The typical result is that they miss the market upswings and their gains are much less than what they would have been if they had just stayed the course. Trying to time the market just does not work consistently enough to build wealth over the long term.
Additionally, there is an overwhelming amount of research that shows that long-term investing — even through a stock market downturn — yields better results over the years than trying to time a decline, remove capital, and return when “things are better.” In fact, studies of 20-year periods demonstrate that missing just 10 of the best days in the stock market over two decades can dramatically affect an investor’s rate of return.
Maintain A Long-Term View
Solid, fundamental business characteristics do not make a stock impervious to daily price movements, and all asset classes fluctuate including bonds and real estate. However, just as your home’s value can grow over time, stocks of quality, financially sound companies also possess long-term growth potential. We believe that stocks are essential in order to outpace inflation and generate real wealth over the long haul.
If you focus on your long-term financial goals and not short-term stock market fluctuations, you can be successful. So as stock market volatility causes people to be fearful, try to focus on quality businesses that can help defend against what we believe is true risk – the permanent loss of capital.