“A harmful truth is better than a useful lie.” - Thomas Mann
Pop Quiz: If you pull up a chart of a stock and that chart shows price going nowhere for three years, is the performance of that stock flat? What if a stock chart is trending down – does that means the performance of that stock is negative?
One of the most pervasive myths in the investment business that seemingly everyone falls for is equating price with performance. Often times some trader will proclaim with conviction that “price is truth” and that all one needs to do is pull up a chart of an investment to determine just how well, or poorly, an investment has been. (Related reading: Why Do Companies Care About Their Stock Prices?)
Yet, nearly anyone who looks at charts is wrong in their conclusions about performance. Why? Because nearly all charts are ex-dividend and distribution. Dividends and distributions result in price dropping by the amount of that dividend or distribution as those payments are made to underlying shareholders. Often times those dividends and distributions are reinvested automatically back into a stock or mutual fund, as shares are bought in the amount of that cash payment, increasing the total position size (with a lower market price) such that the total position value is unaffected.
Put simply, charts lie because the vast majority are NOT total return, and that matters a heck of a lot. The return of an investment comes from price + dividends/distributions and the subsequent compounding that results. I cannot stress that enough. A stock can be going sideways or look like it has gone down for a few years, but when including dividends and distributions, that investment might have actually made you money. The same incorrect view of an investment’s performance applies to most broker statements. When analyzing a position’s actual gains or losses, most brokerage statements calculate that gain or loss based on the cost basis and statement date price of that particular investment. What is not shown is the investment’s true gain or loss when incorporating dividends.
And don’t underestimate the importance of that. Total return is everything. While the media quotes the performance and level of the S&P 500 Index, the index you hear in the media is not total return. As a matter of fact, nearly all headline market averages referenced are price-only, and not total return. Why does that matter? Because the level of the S&P 500 today isn’t the true performance that comes from investing in stocks. The total return of the S&P 500 including dividends since inception looks remarkably different.
This is not a mistake. Charts that look at price alone are massively wrong, and should not be used to assess any investment, whether it’s a stock, bond, mutual fund, or Exchange Traded Fund. All four of our award winning papers purposely use total return data (click here to download) precisely for this reason. So do yourself a favor and don’t make the mistake everyone else makes. Price is not performance. Total return is. Too bad almost no charts or statements show that.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
