Speaking of being better off waiting, I also wanted to touch on something that hurts many investors, especially in this type of environment. That something is the ability to do … nothing. That’s right!
It’s hard for most investors to do nothing because, let’s face it, in life, success is usually defined as the ability to get things done. If you’re a salesperson, you go out and sell stuff. If you’re a teacher, you teach people. It’s not often you find a profession where the right move is to do nothing.
Moreover, just think of the ways people involved in the stock market are described—investors (you invest) and traders (you trade). Nobody describes themselves as “somebody who occasionally buys stock and sometimes does not.” Doesn’t quite have that catchy ring, does it?
Yet the lesson I’ve learned many times (too many times, unfortunately) is that the more you trade, the worse you’re likely to do. I don’t mean, necessarily, that a swing trader will make less than a long-term investor. What I mean is that, if you normally make 10 trades in a month, and then kick that up to 25, your results are likely to decline markedly.
Really, so much of garnering above-average investing results comes from not losing money. Part of that, to be sure, is to cut all losses short. But part of it involves avoiding the “churn periods”—those times when you seem to be buying and selling, buying and selling, buying and selling, but not making any real progress, often taking a bunch of small losses each time. The end result: Poor performance and larger drawdowns.
Usually, this churn comes about because an investor fears missing an upmove; he or she sees a good-looking stock with an attractive story, and thus buys the stock even though its chart or the market isn’t quite right. Or, in the current environment, that investor might get sucked into buying a bunch of stocks every time the market stages a solid up day … only to be forced to sell a week or two later when the downtrend reasserts itself.
Here is a vital point: Having studied my monthly results for my own trading, I can tell you that it’s usually just a couple of months each year that “make” my year. In other words, in a decent year, there are usually two or maybe three months that I really make good money, while the rest are either right around breakeven, or have small losses.
Thus, while most people think that doing nothing is an investment sin, I actually think the opposite: If I could eliminate or cut back on my trading during those “bad” months, I could boost my results in a big way! This is actually one of the hardest lessons for me to implement, partly because it’s my job to sit in front of my computer.
Nevertheless, I’ve been working hard to trade less—forcing myself to wait for the proverbial fastball down the middle of the plate—which has helped me avoid more serious losses during challenging market environments like we’ve been in since early May. I think it’s a good lesson for everyone; more trading is not always better … in fact, it’s usually worse!