Jeff Bezos is known for his long-term mindset. When once congratulated on Amazon’s great quarterly results, he said that those numbers were already baked in with decisions made years before. He is now making decisions that will show up in numbers, not next quarter but many years down the road.
This applies to all businesses. We don’t expect a business to make investments in R&D or expand a factory and start churning out profits next day or month or even year. It takes many years for the outcome of those investments to show up on a business’s bottom line.
And the bottom line is what ultimately counts. If there is no bottom line (profit), there is no value. If there is no value, the price of your investment is eventually going to zero.
Short-term price changes hence are irrelevant because they are mostly noise. Only the long-term matters because that is when the discount rate assumed to embark on a project by the business you own, shows up on its balance sheet which then ultimately gets reflected in its stock price. The discount rate that a business uses is your expected rate of return when owning a stock in that business.
But then who doesn’t like bargains in everything we buy, including investments. So when Mr. Market behaves irrationally which it does from time to time, we use some of that irrationality to our advantage. We re-balance into investments that are trading at cheaper prices and re-balance out of investments that trade dearly. This assumes no tax consequences or else we sit tight.
And this does not require being constantly glued to our screens. I keep a fair amount of distance from my money. If I am saving for a goal that is 20 years out, what happens to my portfolio on a day to day basis is irrelevant even when the dollar amount swings are huge. I have learned to adapt and oftentimes ignore volatility because I know what I own and why I own it.
So no apps on my phone, no logging into accounts every day, no watching the markets on a minute by minute basis, just a process that I follow for my junction in life.
We do the same with your money. If portfolio changes are necessary, they must align with the process that has been built and refined over the years for your junction in life. We don’t let short-term market noise pollute your long-range plans.
Talk about noise, Warren Buffett lives a thousand miles away from Wall Street in the big bad world of Omaha, Nebraska. Nothing against that cute little town but that is not where all the action is.
And that is precisely the reason he lives there. Buffett is a man of few wants. He doesn’t care much for the appearance world. And Omaha provides him with that perfect setting that keeps him away from distractions and consensus views.
And consensus views are oftentimes bad for your money. You can succumb to them no matter how careful your process is.
There is hence no substitute to building your own reasoning, using your own facts and data and your understanding of history and the markets. Only then you can build conviction. Only then you can filter out all the unwanted noise.
So if you are a great engineer, go be a great engineer. If you are a great doctor, go be a great doctor. Don’t waste your life day trading the stock market because it is not worth it. It will never be worth it. It will keep you addicted and miserable. And being miserable is what you never want.
Thank you for your time.
Cover image credit – John Bastian, Pexels