The stock market is a funny place. If – like me – you looked at your portfolio yesterday (12 June), you were probably greeted by a sea of delightful green.
That was nice. But it also highlights the importance of being in the market at the right time – and the cost of not doing so.
The cost of missing out
Days like yesterday don’t come around often. But that means the cost of missing out on them when they do arrive is extremely high.
Suppose you missed just the 10 best trading days over a multi-decade period. In that case, your total long-term returns would be slashed by roughly 50%.
If you sat out the top 30 days, your overall returns would plummet by an excruciating 80%. That’s enough to do real damage to someone’s retirement planning.
The reason for this is the effect of compound interest. Losing even a couple of percentage points a year matters over the long term.
In other words, being in the right place at the right time is crucial. But knowing when the right time is – to the specific day – is almost impossible.
Why did share prices go up?
The catalyst for yesterday’s market euphoria perfectly illustrates why daily forecasting is a waste of time. It came – as it often does these days – from the White House.
Investors were looking carefully at the situation in the Middle East. But President Trump then announced that scheduled military strikes against Iran were cancelled.
In fact, a planned offensive was replaced by reports of an imminent peace agreement. And the stock market reacted accordingly.
Trying to factor that into a financial model is like trying to predict the World Cup winner with an octopus. People do it, but it doens’t work.
Geopolitics is erratic and has a big effect on share prices – in both directions. But the long-term cost of not being in the market on days like yesterday is extremely high.
My ultimate ‘don’t care about today’ stock
As a case study in this, look no further than Rentokil Initial (LSE:RTO). I own this stock and I have no idea what it will do when the stock market opens on Monday.
What I am confident about, however, is its long-term trajectory. And the industry it operates in is a big part of this for a couple of reasons:
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It’s acyclical – pests don’t pay attention to interest rates, geopolitics, or inflation.
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It’s durable – artificial intelligence isn’t going to make people tolerate pests.
My thesis, however, isn’t just about pest control. There are also reasons why I like Rentokil specifically.
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Greater scale means better optimisation on routes, which results in lower costs.
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There’s a chance to grow through acquiring smaller competitors.
