More Evidence That You Should Ignore The Short Term

by: Roger Nusbaum

(Click to enlarge)

The chart is of a stock we bought in blue about ten months ago compared to the S&P 500 in red. The name doesn't matter for purposes of this post. We bought it for the demand characteristics for its products and its dividend growth.

The time frame is really just a microcosm in the context of intending to hold the name for the long term but the chart is constructive in terms of serving as a reminder of how short term noise can be detrimental to long term portfolio success.

Yahoo Finance reports this stock's beta as being 0.68 and based on the chart that is true except for the times that it isn't. Today the stock is down a little after reporting earnings and some of the previous dips also happened around earnings. Obviously people sold during those dips and while those could have still been very profitable sales they may have also been unnecessary sales.

There is no way to know whether the little rollover today will go on to look like one of the ones circled on the chart but if it doesn't then there will be some future dip that does. In my opinion the fundamental story has not changed but the nature of the trading in the time we've held it give a reasonable expectation of what we can expect--assuming the fundamental story stays the same. Obviously if the fundamental story ever changes then we would need to make a decision about whether to sell it but that is not where we are now.

This morning on CNBC there was a comment about buying some stock on the strength of the CEO commentary on the earnings conference call which is the opposite of what this post is about. If you buy a stock for the long term and end up being correct about the purchase then things like comments on a conference call or other random bits of short term noise will not be a contributing factor to your success with that stock.