Road Cents - Peace of Mind
By Michael Woods, CFP, CIM
Before my family heads off on a long road trip, I change the oil and fuel filters in my truck, check the tires on our travel trailer and ensure the propane tanks are full. These little things allow us to travel with peace of mind, our biggest concern being how far from the park or pool our spot will be when we arrive. If you are a snowbird who’s on the road for six months at a time, you would probably value having peace of mind about both your vehicle and your investment portfolio.
On a recent trip, I woke up to a stock market that was down 1,000 points in a matter of minutes, and I knew I would be taking care of a few e-mails and phone calls that would take me away from the kids during our family vacation. While the 1,000-point drop was of little concern to me (as I will explain), and did rebound, I knew that a few clients, such as Walter and Winnie Bago, would be worried. I would need to help them keep things in perspective for their peace of mind.
Like some readers of this article, Walter and Winnie were owners of a private business before retirement. Like most businesses, Walter and Winnie’s had a head office location, staff and bills to pay, some equipment and inventory. The free cash flow generated from this business grew every year and made the business more valuable over time. Based on the assets, liabilities and cash flow, Walter and Winnie had a rough idea of what their private business was worth and how much they could sell it for if they wanted to. But, unlike the public companies they invest in on the stock market, Walter and Winnie didn’t have people willing to buy their business at a different, often random price each day. This characteristic of the stock market makes it difficult for Walter and Winnie to keep perspective.
For example, if someone had come in to Walter and Winnie’s business and offered to buy it for 5% less than what Walter and Winnie valued it at the day before, they would have thought this person was crazy; they knew the underlying fundamentals of their business did not drop 5% overnight. But when the stock price of a public company Walter and Winnie own falls 5% from one day to the next, they get nervous. If, as with their own private business, they were certain of the underlying fundamentals, there would be no reason to panic.
For instance, if you were invested in XYZ Global Company and the share price fell 5% overnight, that implies that the “market” believes the underlying fundamentals of this multi-billion dollar global company are worth 5% less than they were the day before. However, it is unlikely that XYZ’s assets dropped in value by 5% or their liabilities grew by 5% with no offsetting assets overnight. Much like Walter and Winnie’s own business, the companies they invest in on the stock market grow over years, not hours or minutes with the stock ticker. So if they wouldn’t value their own business daily, why do they bother looking at their “investment businesses“ daily?
The fact is, the day-to-day, and often month-to-month, movement in the stock market is irrelevant noise that only serves to provide smart, patient investors the opportunity to profit from the misinformed. To avoid worrying about your equity investments while you enjoy your time on the road, you need to understand that you are invested in actual companies, not pieces of paper you can swap around on a stock market. These companies have a hard intrinsic value that does not change second-by-second. If you do your homework, you can often buy them below that intrinsic value and sell them above it, all the while ignoring the random noise and preserving your peace of mind. Furthermore, if you are newly retired, you have more time than you think to ride out a storm. Good business can grow a lot in 25 years – just look at Warren Buffett’s outcomes!
After changing the oil before your next road trip, considering looking through your portfolio and developing an understanding of the true value of the investments you own. Then if share prices fall while you are away, you will have the peace of mind to ride out the storm.
Michael Woods is a Portfolio Manager At Odlum Brown Limited
The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Limited may affect the applicability of any matter discussed herein to your particular circumstances. You should consult directly with your financial advisor before acting on any matter discussed herein. Individual situations may vary. Member-Canadian Investor Protection Fund.