An Example of Ignoring the Noise

Jack (John) Bogle is no stranger to the stock market.  In fact, his career has witnessed all of the market’s ups-and-downs over the past 66 years.  He is the father of the index mutual fund and the champion of the individual investor, and he started the famous Vanguard Group mutual fund company in 1974.  When he retired from his role in 1999, Fortune magazine named him one of the four “investment giants” of the 20th century.

The bottom line is that Mr. Bogle certainly knows a thing or two about the nature of the market.  A couple of his most famous quotes are rather interesting given the recent volatility in the markets:

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

“Time is your friend; impulse is your enemy.”

Speaking of market volatility, an even more interesting quote regards something that Mr. Bogle observed only a few days ago on April 9, 2018:

“I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50-percent declines, I’ve seen a 25-percent decline in one day and I’ve never seen anything like this before.”

With an investing titan and market veteran like Mr. Bogle making such remarks, one might think that investors should be running for the exits, that the sky must be falling.  Certainly, the global stock markets have been undergoing a period of rather unprecedented volatility these past couple of months. The one-percent jumps and dips in either direction might not look like a big number, nothing like 50- or 25-percent declines, but in reality they are akin to trying to ride out an ocean storm in a dinghy.  Only the most hearty of investors has the guts to hold on right now.  But who might those be?  What keeps them holding on?

It’s at times like this when being an investor can either feel like heaven or hell depending upon your investing perspective. If you’re the short term type, like a day-trader for example, you’re probably experiencing a mix of both:  the euphoria of choice, of being able to buy into some of the many quality stocks that have taken a beating; then hoping that they will rebound to give you some nice short-term gains, but also fretting if they don’t. If you’re a long-term investor, however, then you’re probably brushing this all off because you’ve trained yourself to have your eyes firmly fixed on the future. If you were extra wise, you would’ve also built up a nice cash position when things were hot so that you could buy some fantastic stocks that have recently had a nice discount.  There is no investing hell for you, and scooping up shares of your favorite stocks at a discount is a little extra slice of heaven.  You also aren’t riding in a dinghy, but probably smartly waiting out the storm in some of the largest of ships on the investing ‘ocean.’

The bottom line: the most hearty of investors who have the guts to hold on right now are those with a long-term perspective that ignores the short-term noise and who also investment in solid companies that are strong enough to weather the worst of storms.

Now that I’ve set the stage about what it takes to ignore all the current noise, I’d like to use the example of one particular company to give ideas about how to practically do this.  I don’t really like to discuss individual stocks in this blog, especially in terms of giving any recommendations, but there’s one stock that has been beaten up of late that I think demands – no, screams attention. I choose it because it’s a classic example of why you need to ignore short-term noise in order to focus on the long-term, big picture. That particular stock is none other than Amazon (AMZN).

This company has endured a sort of double-whammy in terms of its stock price taking a bit of a hit over the past few weeks. First, it suffered along with the market in general due to all of the trade war rumors and threats, which are still ongoing. Then, it took another hit when President Trump started to publicly question certain aspects of Amazon’s business practices that are adding to its already-dominant position in the retail industry.  (I’ll spare you the details; it’s all just short-term noise anyhow.)

The combination of this bad news knocked the stock’s price over 15 percent below its all-time high of $1,617.54 per share in mid-March, dipping down to around $1,362 on April 2, 2018, only about two weeks before this writing.  Even though the stock price has recovered a few percent since then, you need to ignore the advice of anyone who claims that this volatility is over and that the stock price will not plunge further.  In fact, more such bad news can only be expected during such times!

Going back to before, if you are a short-term investor in Amazon, you might have experienced something close to a heart attack with such a dip in price. But if you are a long-term investor in Amazon, this dip in share price might represent a very small one compared to your total return so far, and/or it represents a nice opportunity to buy more shares. It has been sort of like walking into a store and finding one of your favorite products at a nice discount.

But should you only buy a stock because it’s price has suddenly become more attractive?  Sometimes that’s like trying to catch a falling knife in the case of a company standing on shaky ground, either in terms of financial health or the strength of its product and/or service.  However, in the case of Amazon, this is where looking at the big picture needs to happen at a time like this:

  • It’s the dominant player in the world of online retail and still growing by leaps and bounds.
  • Depending upon the source, in 2016, online sales as a percentage of total retail sales was only around 10 percent in the U.S.; online retail is still only in its infancy, even in one of the world’s top markets!
  • Amazon is not just all about online retail.  It’s most profitable segment is actually Amazon Web Services, which is one of the most dominant players in the red-hot cloud computing industry.
  • Amazon has taken big steps toward being in more control of its own supply chain management, meaning less money being paid to third-party companies, to name one benefit.
  • No political act, by that of Mr. Trump or others, will be able to dislodge Amazon from being the world’s leading online retailer; only competition could and anybody claiming to be a champion of a free market will protect this core trait.  Politicians come and go whereas people will be buying and selling until the end of humanity, and increasingly more so online.

The list of Amazon’s strengths, dominance, innovation, diversity, and future opportunity could go on and on.

BUT HERE’S MY POINT:  I’m using Amazon as only one example of the vital need to look at the big picture, to look not just hours and days and weeks, but several years down the road for each stock that you own.  Doing so is the only way to ignore the very big noise that global markets have been making thus far in most of 2018.

Here’s another trick to put things into perspective:  Grab your smartphone.  Open your Apple Stocks app or the Android equivalent.  (Don’t have a smartphone?  Then go online and find a site like this.)  Enter AMZN as the stock ticker symbol.  Look at the share price chart over the past one month, then one week, then 3 months:  not very pretty, right?  Now, look at the chart based on 6 months, 1 year, 2 years, 5 years, and 10 years:  it looks more beautiful as the time frame gets longer!

Now look at the 10-year chart or the maximum time frame and ask yourself these questions:  How significant does the recent dip look compared to the overall share price history?  How significant does this dip look compared to other dips?  How terrible does the “Great Recession” of 2008-09 look in retrospect?

Need I present any other argument about the value of staying invested for the very long-term in shares of the world’s most strong, dominant, innovative, and diverse companies?

Please note:  I’m not suggesting that a stock price chart is a wise tool for deciding upon when to buy or sell, but it’s the perfect tool for putting a company’s performance into long-term perspective when things look ugly in the short term.

Given what I’ve shared, is Amazon a buy?  Absolutely!  It was when many thought it was too expensive on December 30, 2013.  Is it a great buy now?  If you don’t plan on selling your position any time within the next five years, then yes, it’s a screaming buy!  If you plan to hold it for less than that, or if you think you’ll panic and sell at the next dip and ignore the long-term perspective, then put your money in a bank account or stuff it in your mattress and keep it nice and safe.  Curl up into the fetal position, avoid risk at all cost, and then lament years down the road why your money hasn’t gotten you anywhere, why you’ve earned no return on it.  According to Jack Bogle, you shouldn’t be owning stocks in the first place.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!


Sources:

Investopedia – The Greatest Investors: John (Jack) Bogle

MarketWatch – Bogle on stock turbulence: ‘never seen a market this volatile to this extent in my career’

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