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Ignoring the Market Can Make You Rich

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In the hustle and bustle of the investing world, it's easy to lose perspective on the big picture. But even though it runs counter to everything that advancing technology and information at your fingertips provides, there's a simple way you can get back to basics with your investing. Instead of obsessing over your portfolio every minute of the day, turn off the stock tracker and start checking your stocks' prices only every once in a while.

Disconnecting from distraction
As an investing junkie, I don't always find that advice easy to take. There's something hypnotic about watching stock prices rock gently back and forth during the trading day, occasionally getting knocked around in soaring climbs and stomach-churning free falls.

The biggest threat to investing success, however, is emotion. When you're constantly looking at how stock prices move, it's easy to jump to emotional conclusions. When a stock drops $1 for no apparent reason, you might feel like someone knows something bad is coming, and want to sell. When a stock jumps suddenly, you'll feel tempted to buy, sure that you're about to miss the boat on a big bull run. But when the heat of the moment passes and you can think about the stock rationally, you realize just how ridiculous those emotions can be.

In fact, some of the world's greatest investors have taken the view that day-to-day fluctuations mean absolutely nothing. Warren Buffett, for instance, has argued that you should buy stocks that you'd be comfortable holding if the stock market were closed for five years after you bought them. Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) has put that into practice, both by hanging onto long-term holdings like Coca-Cola for years and by insisting on judging performance by book value rather than share price.

Get a smoother ride
Tuning out unnecessary noise helps you focus on the fundamentals of the investments you make. That can prevent some unfortunate mistakes.

Here's an example: Say you only looked at stock prices on a single day of the year, July 31. You'd find one stock that has gone up without fail every year since 2002, some years making big jumps, others more gentle, but without any losses. You'd also find a business that has come back from the dead, offering products that now become best-sellers from the moment they become available. If you'd bought that stock in 2002, you'd feel quite comfortable with its returns and the health of the business.

That stock is Apple (Nasdaq: AAPL  ) , and in reality, its stock has bounced around quite a bit over that eight-year span. The stock lost half its value from July 2008 to January 2009, as more than a few people thought the company's long run of success was coming to an end. But the plunge in the shares was a headfake, one that you never would have had to deal with if you hadn't had to watch stock charts grind ever lower.

Stay awake
That's not to say that you should ignore everything about the stocks you own. It's essential to keep up to date about the fundamentals behind the businesses. You can do this by regularly monitoring financial results and paying attention to news items that could have an impact on a company's core business.

What staying in the dark about share price does is force you to make your own assessments about changes in the condition of the companies whose shares you own. Based on the stock's reaction to its recent controversies, Goldman Sachs (NYSE: GS  ) has clearly made some investors worried about its future prospects, but you might rationally conclude that its long history and reputation for excellence will help it overcome its challenges.

Conversely, Bank of America (NYSE: BAC  ) and General Electric (NYSE: GE  ) saw their shares largely shrug off disappointing earnings reports in April. But if you thought the companies weren't doing enough to sustain their recovery, you could easily have found reason to sell.

Find the sweet spot
Putting your head in the sand about your investments is never the right move, especially when things are going badly. The question, though, is this: When do you have so much information that it stops adding value to your decisionmaking process? If you figure out what information has real value to you and tune out the rest, you'll find yourself much more focused on finding the best stocks for your portfolio.

If you're looking for signals on which stocks to buy, look no further. Fool Anand Chokkavelu has discovered the best buy signal you'll ever find.

Ignorance may be bliss, but Fool contributor Dan Caplinger doesn't like being in the dark. He owns shares of General Electric and Berkshire Hathaway. Apple and Berkshire Hathaway are Motley Fool Stock Advisor selections. The Fool owns shares of Berkshire Hathaway, which is also a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always pays attention to you.


Read/Post Comments (3) | Recommend This Article (11)

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 June 03, 2010, at 11:29 AM, caltex1nomad wrote:

    I'm not a jumpy investor, so I check my portfolio every day. I Dollar Cost Average, so I watch for openings to add to my holdings. This is not for the weak of heart. I was adding to my Portfolio when everyone else was selling (or so it seemed). I was willing to lose in the short-term knowing the market would bounce back. I love those days when the market drops 200 pts because I know I can add to a holding.

  • Report this Comment On June 04, 2010, at 12:08 AM, 11x wrote:

    You can educate yourself on emotions. The majority of the books I've read about investing deal with psychology. "Inside the Investor's Brain" is a typical book I have read that covers a lot of the basics. There are others I thought were great that I can't even remember the name, I've read so many.

    I'd say it's important to just recognize when you are doing something based on emotion. If you are buying something because it's going up in price and you want to hop on before it goes up any more, or selling because it's going down and you don't want to lose more, or buying stocks without a thorough understanding of why, you're probably trading on emotion.

    And you cannot take on more risk than you are mentally suited for, either. For example, if you start buying stocks on margin or buying puts and calls, taking on substantial risk, you're more likely to trade based on emotion.

    I spent 10 years as a trader, reading stock charts. You HAD to look at the stock price and make decisions. That was where emotions could get you, which is why I devoted so much time educating myself in that area. It was worth it.

    You can never expect to act like a robot, just know your limitations and how the mind works. Know that when stock prices start moving around, and you're risking money you shouldn't be, you're likely to do something based on emotion.

    And chances are when you trade on emotion, you will lose money.

  • Report this Comment On June 04, 2010, at 8:45 AM, nickolassc wrote:

    11x, good post. As someone who has been ivnesting less than 5 years, something that has helped me learn to avoid emotional trading is investing an amount that I can absolutely afford to lose in my speculative and quality small cap holdings, while the majority of the rest of my investments are in safe dividend paying stocks that I never plan on selling except due to unforeseen circumstances.

    With these stocks I may never have stellar growth, but I don't have to worry about the day to day as I know in the long run (20-30 yrs) I'll have a nice return.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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