I make most of my income in the stock market by doing nothing. Or at least by doing very little. And that's on purpose. Generally speaking, the less I do, the more I make. This may seem sort of counterintuitive to most people, but a lot of things in life are like that. And yet when I'm doing nothing to increase my income, the hardest part of all is resisting the urge to do something. Anything. Because doing anything at all often turns out to be just a vain attempt to make money. It's usually a forced trade and it hardly ever works out. It's a lesson best learned early in one's investing career.
"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It was my sitting. Got that? My sitting tight! Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money."
-- "Reminiscences of a Stock Operator" by Edwin Lefevre
Once you finally execute the decision to buy a stock, it'll most likely start to move up or down or sideways. When this happens, most investors quickly become a little anxious. When they've seen their stock move up ever so slightly and then move back down to where they bought it, they start to regret that they didn't sell it when it is up and buy it back when it fell back. They also begin to read articles and news stories about the market in general and their stock in particular which begin to muddy the decision making process in their brain. As the days and nights pass and the price action in the stock continues, many investors become overwhelmed with either greed or fear and become tempted to take some sort of action. This usually ends in tragedy.
The way wealth is created in the stock market is by holding great stocks for a very long time. And a great deal of that wealth is in the form of dividends. A prudent investor reinvests those dividends with the single idea of compounding that wealth into even greater wealth. That's just how investing works and how wealth is created. If you want to gain from the appreciation of a stock, you have to own it. If you want to receive a dividend from a company, you have to own the company's stock. If you want to become wealthy, you buy great stocks when they're cheap, hold them for a long time, and reinvest those dividends back into those stocks. Simple, right? Hardly.
So if patience is counterintuitive, how do I incorporate it into my trading philosophy? Here's two things that any investor can do immediately to reduce the number of frivolous trades and improve his over all wealth.
1. Every time you feel the urge to sell a stock you've just recently acquired simply because it risen in price, ask yourself "Have the fundamentals of the company changed since you first bought the stock? Has the sector or industry significantly changed to the point that the company can no longer compete? Are the reasons that you initially bought the stock no longer valid?" If the answers to the questions above are no, then be patient and remain invested.
2. Every time you get the urge to trade, stop and ask yourself "Are the technicals in place such that a trade is prudent? Are any of the momentum indicators screaming that this is the absolute perfect time to trade?" If the technicals aren't right then the timing is all wrong.
If you ask yourself the things above before you make that next reactive trade, you'll begin to realize and incorporate a certain degree of patience in your trading philosophy. What you will begin to discover is that a little more inactivity in your trading may just turn out to be beneficial to your portfolio.
This may just be something worth thinking about.