New investors fail to appreciate how investing strategy has evolved over the past 20 years.
Before the Internet, self-directed investors were confined mostly to the local newspaper, The Wall Street Journal, or Barron’s for ideas. Stock tables were spread out and vetted line by line. The process was both time-consuming and laborious.
Then it was off to the local library with a list of prospects. Value Line or Standard and Poor’s were consulted for their opinion. Reports, if one existed, were two pages long and stored in a three-ring binder. Copies were made.
If your research unearthed a worthy investment, you’d call your discount broker and place a trade. For this, you were charged $35. Prices were quoted in sixteenths. The bid price for a stock might be $100 and 1/16th and the ask might be $100 and 3/16th. There was a lot of overhead back then.
Once the transaction was completed, you’d keep abreast of your new investment through stock prices printed in the newspaper. New information would be gleaned from quarterly reports. Unless it was a large-cap S&P 500 stock or a Dow 30 stock, media coverage was scant. Most of the time, you were in the dark.
This all sounds terribly inefficient, and it was, compared to today’s standards. But inefficiency had an upside – equanimity and improved odds for long-term investing success.
In today’s saturated world, you can get as much information as you want when you want it. This isn’t necessarily a positive. Connectivity can lead to unbearable pain and poor decisions.
Though it is impossible to measure degrees of pain and pleasure, psychologists believe the magnitude of pain exceeds pleasure by a measure of two times or more. The bad registers more deeply and lasts longer than the good. If an investor continually monitors his portfolio, chances are high that he’ll have to endure a lot of pain.
Nassim Taleb offers an insightful example to the pitfalls of continual monitoring in Fooled by Randomness. Taleb’s example centers on an outstanding investor who earns 15% returns on a portfolio with 10% historical volatility. This means that in one year the investor has a 93% probability of success.
If the investor only monitored his portfolio annually, there is a 93% chance he’ll experience pleasure.
But look what happens when the frequency of monitoring increases:
|Probability of Success
The more you monitor, the more likely you’ll confront negative information. The outstanding investor in Taleb’s example has a 46% probability that he’ll run across negative information (and thus pain) if he monitors daily. And remember, the negative registers twice as much as the positive on the brain. Outstanding, and even good, investors make themselves needlessly miserable through constant monitoring. Worse, they are more likely to act on their misery.
To be sure, we monitor our recommendations closely at Wyatt Research. We just eschew passing along noise. No matter what the market is doing at the moment, we generally find that our initial analysis for recommending an investment still holds over the long term. The long term is what matters, not only to portfolio returns but to your sanity.
The best investment strategy is the most simple: ignore your investments, and achieve superior returns.
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