It is tempting to frequently check the share prices of portfolio holdings. After all, share price data is easily accessible for almost any investor. However, it may not be a good idea to constantly check the value of a portfolio. It can affect an investor’s ability to make decisions regarding how their capital is allocated.
For example, they may become increasingly confident and fail to fully appreciate economic risks if their portfolio is in profit. Conversely, they may become worried about losses on one or more holdings in a market downturn. This could affect their capacity to take a long-term view and capitalize on low stock market valuations.
Moreover, shares can trade at levels that are far removed from their intrinsic values for prolonged periods of time. For instance, many companies have valuations that do not accurately reflect their underlying financial performance during bull markets because of buoyant investor sentiment. The opposite may be true during bear markets. Therefore, share prices may not provide any worthwhile insight into company performance or prospects.
A prudent strategy
It may be prudent to check on a company’s financial performance, rather than its share price. For example, reading its quarterly results and, in particular, its annual report in detail may be a more efficient use of time.
Ultimately, the stock market generally rewards companies that deliver improving financial performances via higher share prices over the long run. As such, checking company fundamentals could be a means of increasing the likelihood of obtaining an efficient allocation of capital over the long term.
Indeed, investors in other assets do not necessarily follow a pattern of checking valuations on a frequent basis. For example, property investors do not frequently consult other investors to value their assets. Avoiding constant valuations of property assets may make it easier for investors to take a long-term view and avoid becoming overconfident or worried based on short-term price fluctuations.
This point has previously been discussed by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Chairman Warren Buffett (Trades, Portfolio). He said, “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
Maintaining discipline
Of course, it is easier to avoid checking the price of a property than it is to ignore share prices. Obtaining regular valuations for specific property values is likely to incur fees that are not present when accessing stock prices. As such, avoiding the constant monitoring of share prices requires a significant amount of discipline – especially during volatile periods for the stock market when prices are experiencing wild swings.
However, focusing on company performance can lead to an improved allocation of capital. It may push an investor toward taking a long-term view of their holdings and provide them with more time to unearth new opportunities. Moreover, it may help them to become less emotional about their portfolio, which can lead to more reasoned and successful decisions.
