Stocks You Have to Trade Today

The S&P 500-tracking SPDRs exchange-traded fund traded nearly 550 million shares on Aug. 16, 2007 -- an all-time record for the ETF. That came right after a hair-raising 10% one-month drop. It almost matched that record on Jan. 23, 2008, when more than 510 million shares moved.

That followed a 12% one-month drop.

None of this, however, should be surprising. The stock market's been volatile of late, and history shows that when the market drops, trading volume pops. (Also witness the 485 million shares that changed hands on March 14.)

When the going gets tough, the tough go trading
The simple explanation for this is that the market is an emotional place. As Princeton psychologist Daniel Kahneman told Jason Zweig in the book Your Money & Your Brain, "Financial decision-making is not necessarily about making money. It's also about intangible motives like avoiding regret or achieving pride."

That last point very much explains the following data:

These high-profile large caps have seen daily trading volume rise anywhere from 13% to 160%. Investors worldwide -- even big-money professional investors -- are selling to avoid regret (avoid further losses) and achieve pride (taking action to outsmart the market). They think these are the stocks that, for whatever reason, investors have to trade today. The truth is -- and apologies for the playful headline that adorns this article -- that although you may think trading in and out is the smart move in anxious times, the smart move is exactly the opposite.

It gets even more complicated
Lamenting the chaos in the financial sector that's caused this volatility, Warren Buffett -- paraphrasing a Wells Fargo exec -- quipped, "I don't know why the banks had to find new ways to lose money when the old ones were working so well."  

After all, we're only starting to deal with significant fallout wrought by interest-only strips, credit-default swaps, collateralized debt obligations, mortgage-backed securities, and whatever other exotic issues creative MBAs on Wall Street could package together and advertise as "investment grade."

But to get back to the rhetorical question Buffett raised, the big brains on Wall Street are just like every other individual investor. They make investing more complicated than it needs to be because when those exotic products work, they feel smart -- and because they get showered in bonuses before the sustainability of those products is proved out.

Now, this would all be well and good if complicated and risky investment products yielded consistent and outsized long-term returns, but -- as has become painfully clear -- that's just not the case.

The true path to success is discipline, not smarts
Instead, individual and professional investors alike would be wise to read a recent essay from the big brains at West Coast Asset Management. They conclude that "Over time, the stock market rewards simplicity."

That means buying great companies with simple business models and holding through thick and thin. Not coincidentally, Fool co-founder David Gardner called this the greatest investing secret of all. "Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment," David wrote. "That's what great investors do."

Long story short: There are no stocks you have to trade today
Although the stock market is dropping, investors need to take control of their emotions and stop the increased trading in and out of stocks. After all, these actions will do nothing but generate fees and tax bills -- two notorious long-term return killers.

Instead, as David recommends, hold your great businesses tenaciously, and as the stock price drops, even consider buying more. That's how David picks stocks for our Motley Fool Stock Advisor investing service, and his picks are beating the market by 38 percentage points on average since 2002.

If you'd like to see what he's recommending right now, click here to join Stock Advisor free for 30 days. There is no obligation to subscribe.

This article was first published Feb. 8, 2008. It has been updated.

Tim Hanson does not own shares of any company mentioned. The Motley Fool owns shares of SPDRs. Amazon.com and UnitedHealth Group are Motley Fool Stock Advisor recommendations. UnitedHealth Group is an Inside Value pick. The Fool's disclosure policy is simply read.