Published July 28th, 2015
The 2nd article ever written on Sure Dividend is titled 3 Tips to Stop Checking Your Stocks Constantly. The first article is on PepsiCo’s (PEP) 10% total return potential, but that is neither here nor there.
Constantly paying attention to the stocks you hold is detrimental to your wealth. The more often you check your stocks, the more compelled you will be to do something.
In most realms of life, activity leads to success. Investing is not the same.
Trading stocks for the sake of creating activity is costly. You pay various frictional costs and trigger taxable events, which reduces the funds you have invested to compound your wealth. This article covers how to stop paying attention to your stocks.
Step #1: Realize One Day Doesn’t Matter
There are 252 trading days in every calendar year. The stock market is volatile. Every trading day, stock prices may go up, or they may go down.
Most days, these fluctuations don’t have anything to do with the underlying business you are invested in. As an example, does a slight increase in fear about a Chinese economic collapse really have any bearing on the long-term growth potential of Wal-Mart (WMT)? Probably not.
If every new breaking story on the news heavily sways your investment thesis’ on your portfolio holdings, then holding individual stocks isn’t for your (and that is ok).
What matters in investing is ultimately the strength and growth of the underlying businesses in which you are invested. What doesn’t matter is what the stock market thinks the shares of one of your businesses are worth every single day.
Step #2: Listen to Warren Buffett
Warren Buffett has amassed a $70 billion fortune from his investing acumen. He is by far the richest investor in the world. Warren Buffett is an advocate of long-term investing. Warren Buffett is the opposite of a day trader, as the quote below shows:
“I buy on the assumption that they could close the market the next day and not reopen it for 5 years”
– Warren Buffett
This is not Warren Buffett’s only quote advocating buy and hold investing. Several of Warren Buffett’s other quotes on holding for long-periods of time are shown below:
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever”
“Benign neglect, bordering on sloth, remains the hallmark of our investment process”
Warren Buffett is very clear on his investment period. He is looking for businesses (stocks for us non-billionaires) he can buy and hold indefinitely.
Step #3: At Max, Check Quarterly
All publicly traded businesses release quarterly earnings reports. These reports give you an update on how the business is going. Businesses typically don’t go through mammoth changes every 3 months.
The maximum you should check into a business – and I mean the actual business, not the stock price – is once a quarter. Quarterly reports are probably still too frequent of a period to check for a long-term investor, but they do provide valuable insight into the direction a business is going.
When checking quarterly reports, don’t become overly pessimistic (optimistic) from one quarter of poor (better-than-expected) results.
We’ve all had bad quarters in our personal lives. It doesn’t mean we are doomed to go down a linear path of decline every quarter thereafter. Likewise, if we have a really good quarter personally – say get a new promotion or exercise much more than average, it doesn’t mean this will happen every single quarter indefinitely… Although getting a promotion every quarter sure does sound nice – in a decade, that’s 40 promotions!
People in general, and in my experience especially those in the finance and investing profession have a tendency to extrapolate recent results into the distant future, myself included.
Don’t fall for this bias. Instead, look at quarterly (or annual) reports to get a snapshot of where the business is. You should look to make sure it is not in any serious danger. Big warning signs are high debt coupled with negative cash flows, or a cut in the company’s dividend. These are things that should be taken seriously. They don’t happen frequently to high quality businesses.
Step #4 Spend Your Time Wisely
We are all guilty (everyone I’ve ever known, at least) of spending time less than optimally. Daily checking of stock prices is a waste of time.
Time is money. The more we waste, the less valuable our lives become. There is no real joy to be gained from checking stock prices. In my experience, it only causes unnecessary worry and anxiety.
Your time is better spent on almost anything else, other than stock prices. You will notice that the financial media is constantly discussing stock prices and reporting on the daily fluctuations of businesses.
This is because it makes much better news than headlines like “Nothing changed today at Coca-Cola”, and “business as usual at Costco”. Those are headlines I do not want to hear about… Frankly, they are boring.
In investing, boring is good. Boring means there are no crisis, no unexpected surprises, only continued profits. Focus your time on things that matter, not on what other people think the business investments you have are worth.
Barbara & Odean have proven that individual investors who trade frequently underperform. Don’t let that be you.
Focus your time on what matters to you. The daily fluctuations of stock prices do not matter. There are so many things that are so much more important. Checking stock prices too often will only result in a greater desire to trade, which results in lower returns over time, all other things being equal.