Now Is the Time to Stop Trading Stocks

For the vast majority of us, trading stocks is a fool's game.

Really
It's a game best left to professional traders who wake up at 3 a.m. to check the pulse of foreign markets. It's best left to folks who subscribe to the Dow Jones Elementized News Feed, which allows traders to trade even before their brain has had time to process the information they're trading upon.

But that's a beautiful thing for us, because we shouldn't even want to compete on an unleveled playing field. More on that later.

Let's go to the videotape
The Wall Street Journal recently reported the case of a Credit Suisse banker who was charged with insider trading. According to the Journal, the gentleman allegedly leaked word of nine mergers to a trader friend who (allegedly) made $7.5 million off that information -- $5 million alone on the huge buyout of TXU.

This is hardly surprising to cynics. And given the highly public Wall Street improprieties of recent years, maybe it's not even surprising to us average non-Wall Street investors. Even so, it should tell us something.

That the odds are stacked against us
Yet again, we have an example of insiders making (illegal) deals for insiders. And that should really hammer home a point: Trading stocks is a fool's game. Average investors will fail to outwit professional traders for two reasons:

  1. Professionals trade on information faster than you can. They have more resources, time, and motivation -- while you trade before you head off to work, trading is their work.
  2. Wall Street will take care of its own. (And yes, that excludes you.)

Why this is good news
Leave the trading to them. All too often, trading is hazardous to the wealth of individual investors.

That's because trading isn't worth your time or money. Saddled with brokerage fees and taxes, you have to be an all-star trader just to cross the break even point.

And given the informational disadvantages, it's a fool's game anyway. As we've said before, we're better off buying great companies and being patient owners of those great companies.

That's how the world's billionaires invest -- and we'd do well to take their example.

The market's guarantee
In an insightful essay titled, "Rich Man, Poor Man," Richard Russell explains why billionaires are so successful: "Wealthy people don't need the markets."

Come again?

As Russell notes, "Wealthy investors don't need the markets because they already have all the income they need."

Now contrast that with average middle-income oddlot investors:

"This fellow always feels pressured to 'make money.' And in return, he's always pressuring the market to 'do something' for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. ... And because the little guy is trying to force the market to do something, he's a guaranteed loser."

Heck, we'll even put a finer point on it: If you spend your days trying to bend the market to your will, then you're a guarandamnteed loser. And that hurts.

All is not lost
Fortunately, there's a way to make yourself a guarandamnteed winner. All you have to do is let the market do its thing. Buy some stocks -- preferably, great companies at good prices. Be patient. And let the market do its thing.

See, here's the thing about the market: Despite all of the insider trading, analyst brouhahas, naked short selling, et al. that can wreak havoc on investor stomachs on a day-to-day basis, the market has a very calming backstop: It tends to go up.

Well, not always. But more often than not. Consider some of the stocks held by Warren Buffett -- our proxy here for someone who reliably finds great companies. While Warren is known for his ability to buy great companies when they're particularly cheap, if you take a look at the long-term charts for these stocks, it didn't matter if you bought them low or your bought them high -- just so long as you bought them 20 years ago:

Company

Return since 1987 low*

Return since 1987 high*

ConocoPhillips (NYSE:COP)

17.5%

14.5%

Johnson & Johnson (NYSE:JNJ)

16.2%

14.4%

Anheuser-Busch (NYSE:BUD)

12.5%

11.1%

Coca-Cola (NYSE:KO)

16.2%

14.5%

Procter & Gamble (NYSE:PG)

15.8%

14.5%

Wal-Mart (NYSE:WMT)

15.7%

12.7%

US Bancorp (NYSE:USB)

15.0%

13.7%

S&P 500

9.8%

7.9%

*Annualized.

The Foolish bottom line
Sure it would have been nice to get in at the lows, but it wasn't necessary. To beat the stock market, you don't have to be a timer, or a trader, or even an inside trader. All you have to do is buy great companies with a willingness to hold them through inevitable ups and downs.

That's one of the principles that guides Fool co-founders David and Tom Gardner at our Motley Fool Stock Advisor service. And while the service was only conceived five years ago, the strategy has already proved its worth: Stock Advisor is beating the market by 40 percentage points.

You can join us as we try to find stocks that will crush the market for the next few decades by clicking here. And we'll even try to pick up shares at bargain prices when the opportunity presents itself.

Neither Brian Richards nor Tim Hanson owns shares of any company mentioned. Johnson & Johnson and US Bancorp are Income Investor recommendations. Coca-Cola, Anheuser-Busch, and Wal-Mart are Inside Value selections. The Fool's disclosure policy has its own page on the Internets.


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