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Outside of ignorance, impatience is the principal detriment to successful investing.
The investing environment of today promotes impatient investing habits.
No time has been easier than the present for investors to analyze or invest in stocks. No time than the present has offered investors more investment options: Stocks, bonds, commodities, and exchange-traded funds (ETFs) of every sort and size for the taking.
Spreads are razor thin, commissions are barely perceptible, trade executions are lightning quick. Everything is available, it’s available on the cheap. Thank you, internet.
It was all so different a couple decades ago.
Entering the 1990s, do-it-yourself investing was an effort and an expense. It was a lot of paperwork and elbow grease. If you had a few bucks to invest, you knew you had work to do.
You’d begin with the latest edition of The Wall Street Journal or Barron’s. You’d peruse one or the other and write down the prospects in a notebook or a yellow-paper tablet.
Then a “screen” was performed by spreading the Journal’s or Barron’s stock tables across the kitchen table. The screen was limited to the variables offered in the tables: P/E ratio, 52-week prices (high or low) and dividend yield. Stocks that met your criteria or piqued your interest were added to the notebook or tablet.
This initial analysis alone could consume half a day. The work had just begun.
You were off to the public library to see what Value Line Investment or Standard & Poor’s had to say. Even with the wind at your back – all the publications were readily available and provided the desired analysis – you could easily kill a full day.
You weren’t done yet. You’d then call your broker (from a landline) and request that he forward the latest annual and quarterly reports for your prospects. You might even receive the reports that same week.
Once you’d gone through the reports, perhaps performing additional analysis, you’d call your broker and place your trade.
If he were a discount broker, he’d charge you $45 for each trade. He’d quote you a price in sixteenths (1/16, 3/16, 1/8, etc.). The spreads tended to be expansive in the good old days.
This all sounds terribly inefficient, and it was. But there was an upside to this inefficiency: It cultivated patience and discipline. You bought a stock, and you stuck with what you bought.
You stuck with it because you had no easy egress. Cost also served as a gate.
You also stuck with what you bought because you could. You were isolated from an unending volley of noise and opinion. Headlines featuring “slashed,” “crushed,” “destroyed” or “decimated” were rare.
You would go days, weeks, and even months without reading an opinion on your investment. Your nerves were barely stimulated, much less frazzled.
Today, all the information and opinion you could want is a mouse click away. Information is cheap and immediate, as is the ability to trade this cheap and immediate information.
Efficiency is a desirable thing if you are assured of paying a reasonable price. Unfortunately, the price paid was frequently unreasonable. Your investment returns pay the price.
Efficiency encourages activity. When it’s cheaper to trade, investors trade more frequently and more to their detriment.
Embrace inefficiency, create obstacles. In your investing habits, set boundaries on when you will read market information and from whom you will read it. The less you are barraged and stimulated, the more likely you will generate higher investment returns – much higher returns.
A study published in the American Association of Individual Investors (AAII) divided investors in groups by trading activity. The study found that the buy-and-hold investors outperformed the most active investors by six percentage points annually.