If you have recently considered investing in Alphabet Inc. (the parent company of Google), then you may be familiar with the below chart which shows the share price movement over the last quarter of 2018:
(Yahoo Finance, 2019)
From peak to trough, the company’s market capitalisation reduced by more than $145 billion during this period. Therefore, being the savvy, well-informed, Buffett-esque trader that you are, you may have identified 28 October 2018 as a fantastic opportunity to buy Alphabet’s shares at a 15% discount to where they were trading less than a month prior. You probably would have given yourself a big pat on the back when the price started to track back up towards the end of November, only to curse the world when markets moved against you shortly after. But wait, now things appear to be on the way up again, at least for the moment...
So, what’s the point?
A short-term approach to investing is a rollercoaster ride, fraught with both the highest-highs and the lowest-lows. When your timeframe is so narrow, you could invest in the world’s biggest ‘blue chips’ through a bull market, and still lose money.
A key consideration in relation to Alphabet’s recent price re-rating is that nothing has actually changed in terms of the company’s fundamentals (e.g. revenue, debt, expenses). However, investors are reactionary by nature and overall market sentiment has been poor due to the potential of rising interest rates, the ongoing fear of trade wars between the United States and China, and Brexit concerns.
Now, let’s put things into perspective by taking a longer-term look at Alphabet’s capital growth over the past 5 years.
(Yahoo Finance, 2019)
If you had invested in January 2014, you would have almost doubled your money today, despite recent market jitters. Furthermore, Alphabet continues to increase their revenue streams through the monopolisation, monetisation and expansion of a plethora of its internet based platforms (e.g. the Google search engine, YouTube, Maps, Lens). The company’s self-driving car program, Waymo, is also poised to be rolled out globally and whilst the impact this technology will have on the world is difficult to predict, it will undoubtedly be disruptive. Alphabet’s long-term prospects are arguably as strong as ever, and yet the share price has fallen recently, along with the rest of the market.
Where to from here for Alphabet’s share price?
In the short-term, it’s impossible to consistently predict market movements, although, and as previously stated, Alphabet’s long-term prospects are promising. Importantly, at BDO we do not make investment into Alphabet directly as we instead defer to investment specialists, some of whom happen to currently hold this company within their portfolios. Whether or not their view is to buy, hold or sell isn’t of particular concern for us, and what we instead value are fund managers who have a defined, disciplined and repeatable investment process, as well as a long-term history of outperforming the market.
Ultimately, maintaining a disciplined investment approach through market volatility and avoiding reactionary behaviour is the best way to ensure your long-term investment objectives are achieved. Take, for example, the S&P 500 Index, which tracks the 500 largest US listed companies, where six of the ten best trading days over the 20-year period from January 1996 to December 2015 were within two weeks of the ten worst trading days (J.P. Morgan, 2016). This index returned an average of 8.2% p.a. during this period, however missing the top 10 trading days (by being out of the market) reduces this average return to just 4.5% p.a., whilst missing the top 20 trading days resulted in a 2.1% p.a. return (J.P. Morgan, 2016). Therefore, investors who move in and out of the market will invariably be worse off than those who maintain a fully-invested approach.
As the old saying goes, “It’s not timing the market that allows for investment success, but instead, time in the market.”
If you would like to learn more about how a long term view to investment could work in your wealth management portfolio, get in touch with a BDO Private Wealth Adviser.
J.P. Morgan Asset Management (2016). Guide to Retirement: 2016 Edition. Retrieved from https://am.jpmorgan.com/blob-gim/1383280097558/83456/JP-GTR.pdf
Yahoo Finance (2019). Alphabet Inc. (GOOGL). Retrieved from https://finance.yahoo.com/quote/GOOGL?p=GOOGL
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