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 on.

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 breakeven 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 follow 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 odd-lot 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 guaran-damn-teed loser. And that hurts.

All is not lost
Fortunately, there's a way to make yourself a guaran-damn-teed 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 Buffett is known for his ability to buy great companies when they're particularly cheap, if you look at the long-term charts for these stocks, it didn't matter if you bought them low or high -- just so long as you bought them 20-plus years ago:

Company

Return Since 1987 Low

Return Since 1987 High

ConocoPhillips (NYSE: COP  )

1,766%

1,010%

Johnson & Johnson (NYSE: JNJ  )

1,847%

1,332%

Anheuser-Busch (NYSE: BUD  )

1,183%

906%

Coca-Cola (NYSE: KO  )

1,270%

914%

Procter & Gamble

1,795%

1,414%

Wal-Mart (NYSE: WMT  )

2,025%

1,159%

US Bancorp (NYSE: USB  )

588%

490%

S&P 500

312%

187%

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 and be willing 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. Today, with stocks at record lows, it’s a better time than ever to be a long-term buyer of stocks.

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.

This article was first published on May 16, 2007. It has been updated.

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 Internet.


Read/Post Comments (5) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2008, at 4:22 PM, Brettze wrote:

    Use your mindpower not fossil energy!! Use your mindpower to conserve energy!! Use your mind, use your mind!!! Energy conservation runs on , guess what?, your mindpower....

    Your mind is out of shape,, exercise your mind!! Your mind will be stronger and you will conserve energy more with stronger mind power!! Keep your mind in shape ! Flex your power by flipping switches everywhere! Hang your washed clothes on an indoor clothesline to dry.. Stop using your dryers!! Use your mindpower and creativity!! Mindpower will defeat fossil fuel corporations!! Every homeowner and apartment dweller should turn off thermostats one or two days a week to conserve energy and wear sweaters and thermal underwears!! This is just one of many, many ideas to conserve fossil fuel !! Keep fossil fuel prices suppressed forever!!! Even if fossil fuel prices stop falling, we will pay even less with increased energy conservation overall.. We must put a serious seige around the fossil fuel industry!! We must mean business with our mindpower!!! We are not weak!! We are strong! We can and must defeat the fossil fuel industry!

  • Report this Comment On October 31, 2008, at 4:27 PM, Brettze wrote:

    Tim

    Do you know that possession of stock certificates PREVENTS maninpulators from borrowing your shares for their own accounts like short selling or even lending money to anybody!!??? Individual investors think it is a hassle to hold stock certificates which is true.. For now, all mutual fund managers must and should demand stock certificates from their brokers, but they are too lazy to do so.. We can and should have electronic (online) stock certificates in the future.. Do you know that if you have 100 GE shares in "street name" with your broker and you see it on your monthly statements and if you call your broker to deliver a stock certificate for your 100 GE shares, your 100 "street name " GE shares will disappear from your statements.. ??? What it tells you is that your broker carry double entries and lend your shares to anybody while you "hold " them... Heck of a funny money!! All is true above... nobody is mentioning this .. All is silent and golden!!

  • Report this Comment On October 31, 2008, at 4:29 PM, Brettze wrote:

    Tim

    you are apparently favoring fossil fuel, cigarette, vice stocks and you were happy trading untiil they are down and you suddenly start bitchin' about insider stories ... You knew about them all along until everything is not in your favor and you start bawling.....

  • Report this Comment On October 31, 2008, at 4:31 PM, Brettze wrote:

    You talk like Aflac politics,, you goes on talking for yourselves while AFLAC goose honked around trying to alert everyone about things that they should know , yet you ignore the goose!! You prefer to lie to yourselves....

  • Report this Comment On October 31, 2008, at 4:32 PM, Brettze wrote:

    USE YOUR MINDPOWER OVER FOSSIL FUEL INDUSTRY AND UTILITIES... FLEX YOUR ENERGY!! FLIP SWITCHES!! EXERCISE YOUR MINDPOWER NOW!!! STOP IGNORING EVERYBODY!!

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