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The misleading allure of rising share prices

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Last week, the first glimmers of reality distortion began to appear in my portfolio. By the end of February, I expect it to be far more visible, with my online portfolio-tracking tool telling me what a smart investor I am.
 
And by the end of March – March 24th, to be precise – it will be telling me that I’m an absolute genius. You’ll get that same warm glow, I’m sure.
 
Puzzled? Let me explain.

Handy tracking

Many of us use such portfolio-tracking tools, and I still mourn the loss of the now-retired one from Google. These days, I use the free tool provided by the Financial Times – perhaps you too use it, or the one provided by Yahoo.
 
Such tools are a handy way of aggregating together, in one place, multiple accounts with multiple brokerages. Even if you’ve only got one account, they’re also an excellent way of getting a real-time view of your investment portfolios without individually logging into them.
 
Most such tools provide some sort of 12-month comparison, showing how you’re doing now, compared to how you were doing a year ago.
 
With the Financial Times’ portfolio tracking tool, it’s exactly that: across the complete portfolio as a whole, and across every individual account, it shows the percentage movement between a year ago, and now. There isn’t, I don’t think, any way of switching this off.
 
With Yahoo’s tool, an annualised gain figure is provided on a share-by-share basis. It’s not enabled by default, and it’s only selectable on those portfolio ‘views’ that can be edited. There’s also a 52-week graphic visualisation, also on a share-by-share basis.
 
Either way, you get a good feel for how you’re doing, and your performance as an investor.

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Or do you? I’m not so sure.

The problem is that a 12-month comparison is precisely that: a comparison between now, and exactly 12months ago. So rather a lot depends on exactly what was happening 12 months ago.
 
And by the end of January 2020, Covid-19 wobbles had started to affect the markets. The Footsie closed at 7,674 on 17th January. On 31st January, it closed at 7,286 – a 5% fall. 7,674 on 17th January was to be its high-point of the entire year, although we didn’t know that then.
 
By the end of February, it would close at 6,581, a fall of some 14% from that 17th January high point.
 
And on 23rd March, it would fall below the 5,000 level, to 4,993.
 
Put another way, if the Footsie remains at exactly the same level it is at today, all the way through until 24th March, then on 24th March a 12-month view will show a gain of 23%. And as investors, we’d be feeling pretty smug: a 23% gain in a year. Wow!
 
In reality, of course, we’d still be 1,200 points below where the market had reached on 17th January 2020. Not so good.

Misleading gains, but real opportunities

What to do about such invidious comparisons? Simple: ignore them.
 
Like anybody else, I like to see nice big percentage gains. But I try not to be fooled by them.
 
Almost always, it’s better to ignore random 12-month comparisons, and make more meaningful comparisons, such as against 2020’s high point of 7,674 on 17th January. Thanks to the Google Finance charting tool, that’s very easy to do.
 
So rather than mourn the losses since 17th January 2020, I try and focus on the opportunities offered by the Footsie being on sale – and on sale it is, even now, with markets well up from their March 2020 nadir.
 
And as I remarked in a recent article, I’ve been buying, and have been doing so since the late summer.

Warren Buffett’s hamburgers

Remember: as investors, while we enjoy seeing gains, the reality is that this means that shares have become more expensive to buy. For income investors, for example, that means a lower yield and less income.
 
As always, Warren Buffett sums it up well:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?”
 
As he points out, these questions answer themselves. But now ask the same question again, but in the context of stock markets and share prices:
 
“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”
 
For the time being, we’ve now got that lower stock market. Don’t waste it.

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