Keep your eyes on the road

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Keep your eyes on the road.

Having a three year old daughter, I am often reading bedtime stories, listening to children’s songs, or watching kids’ movies. The song “The Wheels on the Bus” is popular with children. It is repetitive, easy to sing along to, and helps pass the time on long trips. It occupies the mind on the immediately obvious; the wheels on the bus go round and round. Essentially this relieves children of the great patience needed to get to the final destination.

Share prices also go round and round. Over the last 12 months the Australian market has fallen 5% or more seven times. After each fall it has subsequently rallied again, to end the period over 8% up. After every downward move everyone agrees “the sky is falling down” and sells their shares cheaply. A move up is accompanied by a rousing euphoric chorus, “everything is awesome” and everyone dreamily buys shares at ever higher prices.

So the prices of the shares go up and down, but what is the ultimate destination and what will it take to get there? The destination is a more valuable portfolio of shares over the medium term. To get there we must recognise that in contrast to the gyrations of share prices, the value of companies change slowly over time. The key is to invest in companies whose strengths will see them grow in value. Share price movements usually do not reflect this value, but rather offer opportunities to add to holdings when share investors are unduly pessimistic, and to reduce holdings when they are too optimistic. Although it demands greater patience, investing with a keen sense for the underlying value of your portfolio of companies is ultimately more profitable than focusing on share prices.


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