Page 29 - Taking Stock 22 Summer 2019

In the nancial media, there is a focus on explaining short-term uctuations in share price. Commentators often try to attribute every little rise and fall to a particular event or issue. Perhaps the most common factor holding a novice investor back from achieving a great return is a misunderstanding of what happens when markets fall (as they invariably do!) In order to address this, another approach is to go back to basics and consider the following three principles: 1. a share is simply a small slice of company ownership 2. a company’s value ultimately depends upon its present and future cash pro ts it can generate 3. value may not always equal price !BACK TO FEATURES 29 Taking Stock Multi-billionaire and one of the world’s most successful investors, Warren Buffett, has de ned investment as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.” In other words, it requires patience. Buying a stock (or house, managed fund or any other asset) and simply hoping the price goes up soon is not investing. While we may naturally feel emotions based on what the price does over the short term, history has shown it is vital not to let emotions steer our nancial decisions.