It’s hardly a problem when it comes to sex, but it’s a big problem when it comes to investing. What, was that too forward?
When investing, it’s easy to become caught up in hype and activity surrounding the stock market. We have a natural tendency to want to just do something when everybody else is doing something. Red and green tickers flashing every few seconds, streaming news stories, hyper-active Wall Street types screaming their buy orders, and a host of other signals all tell us, often without our conscious awareness, that we are being left behind and that, to keep up, we must partake in the festivities. After all, who wants to miss that quick buck promise from a screaming Jim Cramer? And who wants to sit idly while someone (on TV, nonetheless!) tells them their favorite stock is a dud?
So what’s the problem with this? Well, to put it in plain English, intelligent investing often requires you to sit quietly on your ass. Active trading does several harms to your portfolio.
First, it fails more often than not. Those who believe they know where a stock is headed in the next day, week, or month often have no clue and are merely speculating. Second, it takes away valuable time for thorough research. Time spent sitting and staring at your tickers does nothing to give you great ideas, presents an opportunity cost since you could be reading a 10-K and getting to understand a company instead, and often results in anxiety because you’re so damn worried what the stock will do next. But who cares? If you’re right about it, it’ll go up eventually. Give it time and leave it the hell alone. Third, active trading increases transactions costs. Granted that with extremely low online commission expenses one trade is not that big of a deal, but if you’ve actively traded for an entire year, you’re looking at hundreds, if not thousands, of dollars in excess commissions by year’s end. For most people with portfolios of a small size, this can represent a large percentage of the portfolio. And finally, it ups the value of taxes you have to pay. With short-term capital gains taxed at income levels, trading gives you an extra hoop to jump through in order to beat the market.
How is one to deal with over-stimulation? I, for one, force myself not to look at my portfolio more than once a day (if that), and I never keep any sort of streaming quotes on my computer screen. I avoid reading anything having to do with a short-term trading idea (some say this is ignorant. If so, I say ignorance is bliss. And lucrative). I limit the amount of time per day I spend syphoning through blog posts, message boards, or any other potentially stimulating activities that don’t give much in the way of researched ideas or sound advice (do me a favor and please tell me if my own blog diverges from this). Finally, every time I’m tempted to check quotes or start buying and selling things on a whim, I walk away, take a break, come back and read a 10-K instead.
Conquering the desire to stay active and do something is no easy task. It often requires boring substitutes like reading SEC filings. But I believe avoiding the devastating tendency and conquering over-stimulation is necessary for prolonged success. After all, some things are better saved for the bedroom.