“Prices will fluctuate,” predicted astute banker J.P. Morgan when asked to forecast where the stock market would be next year. Even today, Morgan’s prediction has yet to be proven incorrect.
Markets are unpredictable over the short-term. In periods of high uncertainty, headlines cause large variances in the price of an index and its comprising stocks. When cooler heads prevail, prices revert back to their intrinsic value. From year 2000 through today, there have been 3093 trading days. In total, 8.9% of those days have seen the TSX move by plus or minus 2% compared to the close on the previous day (155 days down more than 2% and 123 days up by more than 2%). In other words, one day out of every 11 saw a price swing of plus or minus 2%.
Because volatility is more probable than not, it is wiser to expend time and energy to discover great businesses with strong fundamentals rather than to worry about unpredictable short term price fluctuations. Companies with a history of returning capital to shareholders, trade at low valuation metrics, and demonstrate a strong competitive advantage within its sector will post stronger returns than the market over the long term.
In Warren Buffett’s words, “If I buy a farm, I’m happy if I don’t get a quote on it for 5 years and the farm does well. But people buy a stock and they look at the price the next morning to decide if they’re doing well or not. It’s crazy.”
