Have you seen the Carvana ad on TV about the couple checking the resale price of their car constantly on their phones? The wife says “hold” while riding on their lawn tractor! The commercial ends with the wife announcing their car reached an optimum price and she sold, also using her smartphone. Investors have been obsessing about the stock market for years. Should you be checking stock prices every day?
We would agree seeing bid and offer prices on stocks is an excellent example of transparency. Shares in a company have a uniform quality about them. One share of Ford common stock should be worth the same as any other share of Ford common stock at the same moment. The price for one share of Tesla would be different because it is a different company.
Suppose you buy a diamond ring from a jeweler (anyone) and decide to take it back for some reason. Unless the jeweler has a “money back return policy,” the price they offer will be substantially below what you paid. There is a spread between bid and offer. In some cases, the markup on diamonds might be 100% to 300%. You are looking at a wholesale to retail price spread. Seeing the price of a diamond in the jewelry shop window doesn’t mean yours is worth the same. There are many factors to consider.
For most Americans, the single largest purchase of their lifetime might be their house. You see house prices in real estate ads constantly. Many Americans live in real estate developments, entire neighborhoods of substantially identical houses. Even if the transaction costs were not too high, most people would not decide to sell immediately because it is a hassle to pack up and move.
Yet people will look at stock prices every day. Let us assume if it is easy to check prices, it is also easy to buy and sell. Some jump in and out of the market. Why is this not a good idea?
1. The government is your silent partner. If you could be in any business imaginable, running a government would be a pretty good choice. Think about it. You amass or borrow the money to invest. You take all the risks. You make money over some time period. The government steps up with its hand out saying, “I realize you took all the risk, but now I want my share.”
2. Short-term trading is discouraged by the tax laws. The government wants companies to focus on running their business, not obsessing over swings in their share price. (They probably do anyway.) If you hold stock a year and a day, then sell, any gain is taxed as a long-term gain, assuming you held it in a taxable account. If you sold in less time, any gain is taxed at the same rate as ordinary income, which can be much higher. Impulsive trading means you are much more generous in the portion of your profits you hand over to your silent partner.
3. When you are selling, someone else is buying. Why might an investor suddenly sell? Maybe they are taking a profit. Perhaps they think the stock will go down in the future. Maybe they think the entire market will go down. Who are you selling to? What is their motivation? When you sell at the market price, another investor is buying at that same price. They might feel the stock is cheap at the price or they see good things ahead in the company’s future.
4. You should not weigh yourself every day. This can drive you nuts. You don’t take your blood pressure or temperature every day either. You do this at intervals you set. Weighing yourself daily can make you anxious about lack of progress and results. Lots of short-term factors play a part. Watching your stock prices constantly can create anxiety. You get a monthly statement from your firm.
5. Unless you need the money immediately, your focus should be on the long term. Most people would probably agree the stock market should do well over time. When you think about price/earning ratios, when earnings go up, stock prices should follow. Plenty of other factors play a part, but you should assume, if you have a diversified portfolio with some professional management, good companies should deliver good results over the long term. Don’t obsess over the short term.
6. What does it cost for the next part of the trade? The ad about the woman tracking her car price on her phone doesn’t tell you that she then needs to go through another separate process to buy their next car. It is likely going to be more expensive because she sells at wholesale and buys at retail. One of the reasons people don’t flip houses is because of the direct and indirect costs involved.
7. Let people do their jobs. This means you should be a long-term investor in companies you believe in. It also means you have an advisor who looks after their clients. Many advisors work with asset allocation models aligned to risk tolerance levels. They have money managers or individual; stocks they like. They have periodic reviews with their clients. Obsessing about the stock market comes across as second guessing them.
8. Leave the driving to others. If you use professional money management in separately managed accounts or mutual funds, someone else is watching not only the U.S. stock market, but world markets too. They are making the day-to-day decisions so you can concentrate on other things, like making money in your chosen career. Even when the market is volatile, you know someone else is watching out for your interests.
9. Look for new opportunities. Wouldn’t it be great to be buying when others are selling? How about assuming your advisor has given good advice, your current holdings are good and if they needed attention, someone would tell you. When I go to the wine store, I ask the staff: “Is there any new arrivals where I should be paying attention?” They know what I like. The same logic applies to your advisor concerning additions to your investment portfolio.
A lot of these conversations might seem like “hand holding.” Sometimes it is necessary.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor is available on Amazon.