After purchasing my first property earlier this year, I registered with popular real estate site Zoopla in order to keep a track on the value of my property. Initially, this seemed like great idea as I could track my property value and net worth in real time. The first couple of weeks went great. My house was up £300 in the first week and £1000 in the next. I remember thinking at the time that I had certainly got a great deal.
But the email I received on the third week ruined my mood. It showed that the value of the property was down £2000. I felt a chill in my spine and immediately thought that I had been ripped off!
Realising that checking my house value on a weekly basis was putting a burden on my mind, I immediately cancelled those weekly valuation emails. After all, this is the home I intend to own for the next 60+ years. Why in the world should I care about a weekly price estimate.
The fact that I cared is the same reason that so many of us religiously check our stock prices each day. After making a major financial decision in which the asset’s future value is uncertain, we seek affirmation that we didn’t just make a huge mistake.
Look at the intrinsic value and not the market price.
When looking at assets, whether it be stocks, bonds or property, it can be easy to get caught up and look at the market price. But you need to remember that if you are looking to sell your asset, you should not look at the market price. If you are not a trader, you should not care if the price goes against you. Rather, you need to look at the underlying economic or intrinsic value of the asset you hold. If you are an investor in stocks, you should only care about the underlying economic engine of the business the stock represents and its ability to pay you ever increasing torrents of dividends.
Just look at a stock like Unilever. Even though it is great business which spits out ever increasing amounts of cash flow, its stock has had a number of down years which have been at odds with the business performance. Whilst the UNVR stock price moves erratically at times, the board continues to express long-term confidence by consistently raising the dividend paid. Someone focussed solely on the market price and without consideration of Unilever’s value creation would have been far less likely to stay the course.
The more we focus our attention on value linked yardsticks and not on short-term market price fluctuations, the more we’ll be able to maintain a patient mindset and give ourselves the best chance of realising high rates of compounded returns.
This is why I have mentioned before that my favourite holding period is forever. Short-term investing can be educational and at times quite lucrative but it is also extremely stressful and time consuming. You are far better off as a long-term investor. By being a long-term investor, you would have more money and a larger stream of passive income five years down the line. Long-term investing is by far the easier route, albeit the more boring, but it is also far more lucrative for the patient than a short term trading strategy.