13th Aug, 2010
Every week night the TV news has a summary of the day’s financial news, with the movement of the All Ordinaries Index being reported. Some days it may go up 28, 59 or 84 points, other days it goes down by similar amounts. The share price and day’s movement of a number of Australia’s biggest public companies are also reported. BHP dropped 22 cents while NAB climbed 42 cents. The next day it may be Woolworths and Lend Lease share prices which are noted. The day after Telstra and AMP will get mentioned. It is a rare day in which the price movements of the shares reported (ie six or eight a day) all go up or all go down. There are always one or two shares which “go against the trend”.
Sitting at home, watching that box in the corner, how do you take to the news? If you think in terms of shares being a risky investment, what you see reinforces your perception. “I bet if I buy XYZ Ltd shares the price will drop straight away and I’ll lose money,” you say to yourself.
The problem with this sort of thinking is that looking at the share prices on a day to day basis goes against the idea of holding shares as a long term investment. If you own, say, Wesfarmers and News Corp shares as a way of funding your retirement (which may be five or twenty-five year away) what does it matter if they went up or down 10 cents in today’s Stock Exchange trading? As long as the share price rises over time, the company pays regular dividends, and the business continues to be well-run, your retirement goals run little risk of not being met.
The reason share prices go up and down every day (or, to be truthful, even more frequently) is because they are a liquid investment. Less than a week after deciding to sell a parcel of shares you’ll have the money in your pocket. On the other hand, real estate can’t be ‘cashed-in’ so quickly. If you decide to sell a property on average it will be five or six weeks before you’ll find a buyer, and a further 30-120 days before you’ll receive the bulk of the agreed sale price.
Shares going up and down is simply a reflection of the liquidity of the asset. The price we pay for the liquidity is the cost of that volatility. Unfortunately a lot of people look at the volatility and use it to say that shares are a risky asset. The cost of entering into an investment has little to do with the risk of losing your money through making that investment; the two concepts are mutually exclusive. A bad investment carries high risk irrespective of whether it cost $1 or $100,000 more, or less, than it cost yesterday.
Oh, and next time you are watching the TV news and are concerned at the graph showing the drop in the All Ordinaries over the past ten days, you may want to ring up your local real estate agent to see whether he or she had a buyer for your home on each of the past ten days. The Stock Exchange tells us the amount people are willing to pay, at that moment, for shares in each of the listed companies. If a real estate agent was to tell you that they don’t have any buyers for your home would your conclusion be that it is, at that moment, worthless?
Irwin Hirsh
