The internet is one of the greatest innovations in human history. This is an undeniable truth. The global system of interconnected computers has significantly improved how we communicate, learn, and entertain ourselves.
As it relates to the stock market, the internet has not only provided investors with access to nonstop financial news literally at their fingertips, but the cost of actually buying and selling has fallen to zero. This has resulted in a major shift in how investors act.
Keep reading to find out what this behavioral change is and what smart investors can do to take advantage of the powerful trend.
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It's a different market today
According to data from the New York Stock Exchange, the average holding period of stocks is less than six months. Since hitting a peak of eight years in the 1950s, this metric has come crashing down.
As I alluded to earlier, I think the main culprits here are easy access to information and commission-free trades. We are constantly being bombarded with news updates, and when it comes to our money, human beings have a tendency to act on any financial updates they receive.
The introduction of free trading by Robinhood Markets led the entire brokerage industry to eventually offer the same thing. Investors can transact at no cost, reducing friction and clearly leading to a much shorter holding period. The popularity of meme stocks earlier this year has undoubtedly added to the desire for quick profits.
It seems as though it's human nature to want to get rich quickly. And our overconfidence leads us to move in and out of positions far too often. A 24/7 news cycle, coupled with frictionless trading, will keep this trend going. I see no reason to believe that the average holding period will reverse course and start to rise in the future. This presents smart investors with an opportunity.
Keep your attention on the big picture
The average investor can't compete with top Wall Street funds that have massive research and technology budgets. These organizations often try to speculate on price movements in an attempt to acquire an informational or analytical edge. There's no way retail investors, with access to far fewer resources, can try and play the same game as these big firms.
This is one of the main reasons why The Motley Fool recommends a prudent, long-term investing strategy centered on owning a well-diversified portfolio of at least 25 stocks for at least five years. Furthermore, because the stock market is unpredictable in the short term, only invest money that you don't need within the next five years. Your patience will be rewarded.
With the above framework in mind, I firmly believe that investors who simply take a longer-term approach to the stock market have a serious advantage compared to their short-term-oriented counterparts. Trading in and out of positions frequently leads to poor returns, not to mention higher tax bills.
Own quality companies
A stock that I still plan on owning for a very long time is Netflix (NFLX 1.05%). While most other investors care only about the next quarter's revenue, cash flow, and subscriber numbers, I worry about where the business will be five years from now. Will Netflix continue adding 25 million members annually? Can it keep producing hit series and movies amid growing competition? How important will gaming ultimately be? These are the questions that matter.
Because Netflix has a proven track record of success, a competitive advantage in the form of its massive scale, and a sizable runway for growth in international markets, I can sleep well knowing that the long-term outlook is intact. Plus, I plan to be a stock market investor for the next 50 years, a perspective that helps me combat the shift in behavior we're seeing today.
Focus not on the next quarter, but on the next decade. Owning a company like Netflix, one that I understand well, allows me to do just that. Be a contrarian in a market full of short-term traders. Not only is there much less competition, but I'm confident your portfolio's results will improve.
