The worst thing the media gives us is the daily stock market update.
"Stocks closed up 0.4% today." "The Dow gave up gains by mid-morning." "The S&P 500 went up during breakfast, fell during lunchtime, and twirled around at 3pm." It's all irrelevant, designed to make nothing look like something.
But I understand people's desire for news, and writers' desire to write. Rather than abandon the daily update, I would replace it with something simpler and more meaningful. Like this:
NEW YORK – S&P 500 companies earned $2.71 billion of net income on Tuesday. $890 million of that will be paid out as dividends, with the remainder retained for future growth.
That's it. The report would be the same tomorrow, the next day, and the next. Figures would be updated quarterly, but the format wouldn't change, ever. ($2.71 billion is what S&P 500 companies earned in the last 12 months divided by 365).
The only consistent way average people can make money in stocks is to let company profits and dividends accrue over time. If you insist on tracking stocks on a day-to-day basis, the only reasonable way to think about them is to track how much accrues to you each day. Maybe you make $10 a day in dividends, or your share of profits this year from companies you own works out to $25 a day. Those are pretty much the only daily numbers that have any relevance to you as an investor, as they offer the closest (but still incomplete) gauge of what you'll earn over time. Warren Buffett took this to the extreme commenting on his Goldman Sachs preferred shares a few years ago: "Our preferred is paying $15 in dividends per second ... so as we sit here... tick tick tick ... it's $15 in the bank."
Doing this reinforces the idea that volatility (stocks going up and down in the short run) isn't the same thing as risk (earning a low return over time). Stock prices change far more than stock values do, and investors frustrate themselves when they confuse the two. Investor Eddy Elfenbein made a smart point about this:
This is a fact that all individual investors should understand when they invest: Each day the S&P 500's intrinsic value rises by about 1/30th of 1% -- a tiny, tiny amount. But the average daily swing on the market is about ... I mean it's come down recently, but historically it's been about 1%. So think about that: Each day on average you're swinging 30 times what the market is actually worth, what the actual intrinsic value is.
Most investors spend too much time tracking stocks and following financial news. But if we're going to have daily updates, report numbers that actually mean something.
Tick, tick, tick.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
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