August 2018 Market Update

— Aug 23, 2018


Facebook hit the headlines during July when its shares tumbled by over 20% on news of slowing growth in new users during the last quarter. This was a drop in value in one day of over $100 billion.

We do not own Facebook shares directly, nor are we making any comment on its future prospects as an investment. Rather we mention this as both a classic example of the ever increasing short termism prevalent in today’s financial markets and a reminder of the danger to private investors of listening to media news headlines.

In point of fact, despite this blip Facebook shares are still up over the past year, something the media, with their obsession on reporting bad news, failed to mention.

It may surprise some to find that research suggests that up to 9 out of every 10 trades are now done automatically by pre determined computer programmes without any human judgement or influence, and consequently the average holding period for stocks nowadays is often measured in seconds rather than months or years.

Improvements in technology have resulted in much lower transaction costs and faster trading speeds. Coupled with new products that enable investors to move in and out of asset classes instantly, this may at first glance all seem a boon for investors.

However in reality all that this frantic activity really does is increase volatility in individual stocks, resulting in much more trading activity and thus actually increasing expenses for active funds and ultimately reducing investment performance.

It also creates an even greater danger for private investors: that they are more easily scared out of holding their long term investments. The temptation to sell in the face of constant dire news headlines is real and can be overwhelming, particularly if you monitor your investments almost daily (which is precisely the reason we would not recommend you doing so).

Couple this temptation to sell with the enabling power of technology to easily make sales creates a potential recipe for disaster. The big gains are made by holding over the long term, and much more money is lost by being out of markets than through any short term fall in prices, which are temporary and all part of the investment journey.