“Why are bank shares up so much lately?”
No, it’s not a rhetorical question⦠it’s one that was sent in by one of our readers.
And it’s a good one.
The answer, unfortunately, is much harder.
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If you’re a regular consumer of financial media, you’ll know that the talking heads are often asked these sorts of “Why did X happen” questions.
And they answer them, confidently, looking straight down the barrel of the camera.
Now, if you’ve been a regular reader of my articles, you’ll know one of my favourite investing quotes comes from John Kenneth Galbraith:
“Pundits forecast not because they know, but because they are asked.”
If he were alive today, he might add a companion:
“Pundits confidently ascribe motivations to share price movements not because they know, but because they are asked.”
Which might sound unkind. After all, I’m often one of the aforementioned talking heads, and I’ve been asked those sorts of questions!
I try to make my answers equivocal. I usually start with some version of ‘We can’t be sure, but⦒ or “No-one knows, however⦒.
Truth be told, I’d be happier if I wasn’t asked, but that’s not up to me.
To be fair, sometimes the question has a very clear and direct answer.
“Why were shares in Company X up 20% today?”
Perhaps because they got a takeover offer. Maybe they released earnings.
They’re pretty clear and direct ’cause and effect’ situations.
Other times, less so.
It’s likely that a move in a commodity price impacts a miner’s share price, but not necessarily.
Sometimes a stockbroker might put out a widely circulated buy or sell recommendation, which might â or not â impact a share price.
And that’s at the individual company level.
What about the market itself?
That’s when things get to a whole new level of abstraction.
On any given day, there are dozens of potential reasons why the share market could move.
But here’s where it gets silly: sometimes it moves because of what traders think others will think â regardless of whether it actually matters!
As I said, silly.
Let me ask you: is that really a game you want to play? Is it something you think you can earn a market-beating return from doing?
Me? No, and no. “Speculating on speculators” is a whole level of abstraction, and a degree of difficulty I can do without!
The good news? You don’t have to play that game. In fact, you shouldn’t!
You can simply let speculators speculate, and go about the business of investing.
But â and this is vital â once you decide you’re not playing that game, you need to get good at ignoring it.
The marathon runner doesn’t worry about the competitor who’s trying to run the first 100m in less than 10 seconds â she knows she won’t win that particular sprint, but she also knows that’s not her goal.
She’s focused on the 42km after that.
Which, I think, is a nice analogy for investing.
Investors â the stock market equivalent of marathon runners â don’t worry about the short-term sprints.
We focus on the marathon itself.
“Am I doing the things that mean I’ll finish the race in good shape?” is the only question that matters.
Sometimes, you’ll feel like you’re falling behind, as others sprint past you. Maybe they get lucky. Maybe they happen to own a ‘hot stock’. Maybe they’re just in the right place at the right time⦠for now.
But then, as you run your own race, you’ll find yourself passing them, as they sit on the side of the road, exhausted, injured, and unable to finish.
That is not the way you want your investing life to go.
Here’s the other thing: you don’t need to “win” the investing race. There’s only one Warren Buffett. And, unfortunately, I’m not him. But I don’t need to be.
I need to do to things:
1. Actually finish the race, without flaming out in the process; and
2. Finish not on the podium, but just with a result that meets my goals.
Which brings me back to the original question.
I don’t know why bank shares are going up. I would imagine it reflects a mood that rates will come down sooner than expected, and that banks will suffer fewer mortgage defaults, as a result. And/or that as rates stagnate, then fall, bank dividends will look better, by comparison, for those looking for income.
Those are plausible reasons. They might even be accurate.
Or not.
There’s no way to know what the tens of thousands of Commonwealth Bank of Australia (ASX: CBA) shareholders are thinking, right now. Or what the hundreds who bought and sold CBA shares yesterday were thinking, then.
So, while we can speculate on the answer, I’m not sure the speculation is useful.
First, because it could be dead wrong, so it’s little more than a curiosity.
But second because even if we did know why, in hindsight, it wouldn’t help us get to our long-term goal.
As Warren Buffett put it:
“… like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”
So, if you get offered a good price – either to buy or to sell – by all means, take it.
But otherwise, ignore share price fluctuations.
Here’s what I’d do, instead: Ask yourself whether the business you own is likely to deliver good results for shareholders over the next 5 – 10 years. And build your portfolio accordingly.
No, that’s not as exciting. And yes, you’ll have to embrace uncertainty. But that’s just investing.
And a helluva lot better — and likely far more profitable — than speculating!
Fool on!
The post Why are bank shares up so much? appeared first on The Motley Fool Australia.
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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