If you’ve invested for any period of time, you’ve probably heard the mantra about investing over the long-term.
It goes something like this. You shouldn’t worry about short-term price movements, see, because they’re basically random. Good ol’ Mr. Market is crazy, and he’s going to shout out some silly prices for whatever you own. Sometimes those stock prices are lower than you paid, and that’s okay. It’s not a big deal until you’re forced to sell.
These people are right. You should ignore share prices over the short-term. All sorts of things can bring down stocks, many of them have very little to do with the overall business. Brexit saw a lot of good companies get beat up for no real reason. Stocks just sold off because everything else was selling off. They’re like your friend getting a tattoo. PEER PRESSURE FOR THE WIN, KIDS.
People who sold during Brexit screwed up, in other words.
But at the same time, here’s why ignoring share prices is silly.
The ultimate example
Say you bought Telus shares today. They trade hands for $41.70 as I write this, and they pay a $0.48 quarterly dividend. That’s good enough for a 4.6% yield. Like any good investor, you’ve vowed to reinvest your dividends.
Let’s assume Telus is going to struggle a bit over the next decade. Shares fall $1 per year and the dividend remains constant. We’ll also assume you own 1,000 shares and all dividends get reinvested into more shares.
Here’s how your investment would look over a decade.
So as you can see, things don’t work out too bad. The 4.6% dividend more than makes up for the $1 per share in lost value, and the reinvesting of dividends creates its own little compounding effect. Even though the investment hasn’t worked out as well as hoped, things are still okay.
Now what about if the opposite happens. How much better would you be doing if the value of Telus shares went up $1 per year?
It’s not even close. Although the first investor would have more than 100 more shares, the second investor would end up far richer. An excess $22,000 over the course of a decade is huge, especially considering how it’s more than 50% of the original investment in the first place. That’s an extra 4% per year, compounded.
So why the big difference
It’s simple. The original principal invested is far more important than any dividend reinvestment.
Look at it this way. The people who strongly advocate that the share prices don’t matter are ignoring a very important variable. You had to put up some of your capital to invest in the company in the first place. 100% of your capital is going to be more important than a 3%, 5%, or even 10% dividend. Every time.
Dividends are important and all of that. I agree with that. But they pale in comparison to the original amount invested.
This often rears its ugly head when chasing yield. Investors want those sweet dividends, ignoring all sorts of warning signs. They collect the dividend for a little while and then the market starts to realize it’s going to get cut. Suddenly, the value of the original investment is down 50% and the yield chaser has a big problem on their hands.
Or as I put it the other day when talking to a friend about Realty Income, which is down 30% in the last few months. “How many years of dividends is that?”
Now this is where things get tricky. You don’t want to be ignoring share prices, because often the market is trying to tell you something. If a stock falls 20%, it’s never just market noise. Especially when the rest of the universe is doing fine. There’s something going on there.
But at the same time, we’ve all sold a stock at the bottom, convinced everything is going to hell, only to watch it shoot much higher. How do you make sure you don’t do that?
I’ve covered this before, when I looked at when I sell. And I continue to say the same thing. Don’t worry about the price. Worry about whether your thesis is still intact.
Is Telus still a dominant player in phone, internet, and wireless? Does it still make money? Is it still insulated from foreign competition? If the answer to all of these questions is yes, then feel free to keep holding. I’d even argue it’s time to buy some more.
What if Google suddenly masters wireless technology and can give you wireless internet for one third the price of Telus? That would be bad news, a very big flaw in the Telus investment thesis. That’s when you’d sell.
Ignoring share prices is dumb, at least in this author’s opinion. You should keep track of the stocks you own, and if one is struggling it should be reevaluated. Take an honest look at it, and if you think the market has overreacted, either stay put or buy more.
Remember, capital gains will be a big part of investment returns if you do it right. Ignore them at your peril.