When You Own the Forest, You Don’t Have to Worry About the Trees

The saying, “He can’t see the forest for the trees,” in one form or another dates back to the mid1500s.1 It’s one of those great proverbs that at first might not seem to make sense. After all, you can’t look at a forest without seeing trees. It’s made out of them.

But the point of the aphorism is that by fixating on what’s in front of you (the trees), you can’t see the much larger, more complex system they’re a tiny part of. 

In fact, actual forests have a lifecycle that depends on the destruction of individual trees. The rainforests of northwest Washington state are sustained by the rotting trunks of fallen mature trees.2 Similarly, forest fires, which are disastrous for individual trees, have been shown to be necessary for the long-term health of a forest.3 Some kinds of trees release their seeds only when their trunk is scorched.

If you visit a forest after a windstorm or a fire, you will see plenty of individual trees that are badly damaged or even destroyed. And in the short-term, areas of the woods can look like a mess. But in the centuries-long timeframe of a forest, it’s a temporary condition that’s actually necessary for its ongoing health.

So what does all this talk about arboriculture have to do with long-term investing?

When you fixate on the price of individual stocks, or even whole indexes in the short-term—the “trees”—you can completely miss the state of the “forest”—broad market returns over decades.

As Warren Buffett said, “All the ticker tells me is the price. Prices don’t tell me anything about a business.”4

As prices fluctuate, investors focused on short-term gains and temporary declines tend to forget that they represent shares in actual businesses whose long-term performance is not really reflected in today’s price.

Financial writer Stephen McBride gives numerous examples of companies whose profit and growth have been consistent for decades, yet whose stock price has had numerous zigs and zags. One of these is Amazon, a company that has grown consistently over the past two decades. But over that time, writes McBride, “Its stock price behaved like a maniac behind the wheel. Since 1997 its stock fell 95% once and 50%+ four times.” And of the 25 years since its IPO (initial public offering), 19 of them have experienced 20% pullbacks. Amazon stock has again been down again from all-time highs. “Yet,” McBride writes, “its business is stronger than ever.”

These dramatic fluctuations are invariably caused by people jumping in and out of the stock, along the way missing out on unforeseen gains and paying unnecessary transaction costs.

For the prudent investor, the performance of a single stock is like the health of a single tree.  It might be in good shape or it might have just been struck by lightning. But the investor who is looking for gains over the long-term knows that it’s a waste of time to visit this tree on a daily basis to see how it’s doing. Instead he or she will look for ways to own a share of the whole forest, enabling them to mitigate risks and participate in the gains only possible with an extended time horizon.

Sources:

1. https://en.wiktionary.org/wiki/see_the_forest_for_the_trees

2. https://en.wikipedia.org/wiki/Nurse_log

3. https://www.britannica.com/list/5-amazing-adaptations-of-pyrophytic-plants

4. https://www.advisorpedia.com/strategists/how-to-ignore-stocks-and-why-you-should/

Disclosure:

The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’) and Family Legacy Advisors, LLC (‘FLA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA and FLA portfolios may contain specific securities that have been mentioned herein. EA and FLA make no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.