There are days when I fully understand why would-be investors throw their hands up in disgust and bid au revoir to the stock market. Days like Monday, for example. Not that the market did anything spectacularly bad, mind you. It's just that I had a little more sitting-around time than usual because of travel prolonged by foul weather along the Eastern Seaboard. So I grabbed some reading material, including that day's copy of The Wall Street Journal. And that's when my hair started to stand on end.
There in the Money & Investing section was an article titled "May Markets Confound Investors." In it, the writer discusses how investors had to bet against prevailing opinions about the economy in order to make money last month. Fair enough, but doesn't this matter only if you're interested in timing the market?
Now contrast the piece about Mr. Market's May gyrations to another, this in the Sunday edition of the Journal. In "Another Bubble Set to Blow Up?" MarketWatch columnist Paul B. Farrell expresses outrage -- rightly, in this Fool's opinion -- at the notion of a retiree "playing the market" with $50,000 using a stock-trading system he apparently learned at a weekend seminar.
Read between the lines, and you're likely to find a set of conflicting signals. Sunday's edition: Invest for the long haul. Monday's edition: Did you make any money in May? Taken to the logical extreme, Monday's piece might worry the investor who saw red in his or her portfolio last month. Seeking to avoid a recurrence in the future, this same investor might turn to frequent trading, because only by doing so could he or she -- theoretically speaking, of course -- keep making money. Yet that also requires a degree of omnipotence that most do not possess.
That's why I'm going to repeat a little from Farrell's excellent article. The facts therein can't be presented often enough:
- Trading really is bad. Farrell writes that behavioral-finance professors Terry Odean and Brad Barber studied the portfolios of 66,400 investors. Their work compared active traders with those who bought to hold. Not surprisingly, the results showed that owners do better than traders. The total average annual returns for the buy-to-hold crowd were 18.5%, vs. 11.4% for the impatient.
- You can never, ever predict the market. Farrell also points out that when Wharton economist and stock-market expert Jeremy Siegel studied 120 of the market's biggest up and down days, he found that only 30 could be explained. Got that? At least 75% of the market's behavior is completely unpredictable.
Remember: Berkshire Hathaway (NYSE: BRKa ) (NYSE: BRKb ) CEO Warren Buffett is rich for four reasons. First, he knows a lot more than either of us. Second, he's remarkably thrifty. Third, he's a phenomenally good insurance company manager who invests with other people's money. And finally, and probably most important, he buys stocks on sale and holds them as long as he possibly can. So don't rent stocks, please. Settle down with the ones you love the most, and let your portfolio reap the gains.
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Fool contributorTim Beyers relishes being an owner and is the landlord of his portfolio. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what stocks he owns by checking Tim's Fool profile, which ishere. The Motley Fool has adisclosure policy.