When You Own the Forest, You Don't Have to Worry About the Trees
The saying, "He can't see the forest for the trees," in one form or other dates back to the mid-1500s.1 It's one of those great proverbs that at first might not seem to make sense. After all, you can't look at a forest without seeing trees. It's made out of them. The point of the adage is that by fixating on what's in front of you (the trees), you can't see the much larger, more complex system they're a tiny part of.
When you fixate on the price of individual stocks, or even whole indexes in the short-term—the trees—you can completely miss the state of the "forest"—broad market returns over decades.
As Warren Buffett said, "All the ticker tells me is the price. Prices don't tell me anything about a business."2
As prices fluctuate, investors focused on short-term gains and temporary declines tend to forget that they represent shares in actual businesses whose long-term performance is not really reflected in today's price.
Take Amazon for example, financial writer Stephen McBride writes "Its stock price behaved like a maniac behind the wheel. Since 1997 its stock fell 95% once and 50%+ four times." And of the 25 years since its IPO (initial public offering), 19 of them have experienced 20% pullbacks. Amazon stock has again been down again from all-time highs. "Yet," McBride writes, "its business is stronger than ever." 3
These dramatic fluctuations are invariably caused by people jumping in and out of the stock, along the way missing out on unforeseen gains and paying unnecessary transaction costs. The performance of a single stock is like the health of a single tree. It might be in good shape, or it might have just been struck by lightning. But the investor who is looking for gains over the long-term knows that it's a waste of time to visit this tree on a daily basis to see how it’s doing. Instead, look for ways to own a share of the whole forest, enabling you to mitigate risks and participate in the gains only possible with an extended time horizon.
3. 3. https://www.marketoracle.co.uk/Article70348.html
Related articles
To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. The longer you are in retirement, the more...
You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you’ll need to fund your retirement. That’s not as easy...
There are some people who would love it if you threw a surprise birthday party for them. They'd enjoy every aspect of it, from the sudden yell of "Surprise!" to being the center of attention to...