Question: Where do returns come from in my portfolio?
Answer: They come from the increase in value of for-profit companies as these companies earn profits and either send these earnings to the owners through dividends or reinvest these earnings in new opportunities or infrastructure.
A quick headline over my phone got me thinking about this. It read:
4/18/11 – 12:32 PM ET
“Stocks are being bouyed by strong earnings from IBM, Coca Cola, and Wells Fargo.”
A few quick reactions:
~ Why do I subject myself to this drivel?! Alas, one of my clients will ask me about this, and I need to know what the talking heads are saying. So I’ll stay connected. Feel free to disconnect from it and check in here. In reality, this kind of short-term news clip is meaningless to the value of YOUR portfolio in the long term.
~ What did these reporters think would add value to the stock market anyway? If not profits, then what? While this seems very simple—company makes profit, stock price rises—many, like this reporter, sound surprised when they realize the connection.
~ The seasoned investor knows that the only reason the stock market will rise is if the value of the companies that comprise the market goes up. The best estimate of a company’s value (and by extension, the value of all companies) is the price of its stock.
Drivel though it may be, the reporter got it right today. I am sometimes criticized for being always negative when reporters over-emphasize something or hype some news to stir our emotions. Let the masses hear: “Evan agreed with a talking head today!” Truth be told, this may be the simplest message in all of investing; never-the-less, he got it right, and far be it from me to be 100% negative.
Have a profitable day!