Do you have any idea how little control you have over your investment results? Certainly, over long periods of time, people who make good investing decisions will tend to outperform those who make bad ones. But tracking performance from day to day is a pretty fruitless activity. It probably just makes you more skittish and anxious than you need to be.
Don't believe me? OK. Let me ask you a question. Did you beat the market today? Let's see, at the time I'm writing this (Tuesday afternoon), the S&P 500 gained a little more than 0.3% on the day. Me? I'm down for the day.
Bummer.
OK, how'd you do the day before that? How about last Friday? How about January 27, 1986?
At some point, even the dimmest among us will clue in to the sheer absurdity of tracking how we did on any given day. I mean, if what happened on a single day in 1986 doesn't really matter to you anymore, why in the world would what takes place today matter? I mean, unless you have one of those truly life-changing market events -- which actually do happen -- then the fact that you went up or down X% on any given day is meaningless. Seriously, think about it this way: One of the biggest gainers on the Nasdaq yesterday was an education technology company called Alphasmart (NASDAQ:ALSM), which rose 22% on news that it's merging with Renaissance Learning (NASDAQ:RLRN). That's a huge day, right?
Well, sure it is. But what that 22% represents is a recovery of market losses that the company has had over a little more than three months. Alphasmart crossed its current threshold in early October 2004 and still sits at about half of its opening day of trading in February 2004. So, which is it? Up 22% for a day, or down 50% for a year?
It depends on your time frame, you might answer. But you know what? It really doesn't. These numbers seem like they matter because they're taking place right now. But how many Alphasmarts were bought out in 1986? If you held one of them, do you still think about that 22% day, or that -50% year? My bet is that you do not. So if what happened several years ago in one single stock in one single day has had scant impact on your investing results, then why in the world would today be any different? Because it's recent?
Actually, Alphasmart offers a good example for the tricks the human mind plays that can harm your investing returns. In this past year, IPO fever has returned, mainly on the back of the boffo returns at Google (NASDAQ:GOOG). But historically, most IPOs are less like Google or eBay (NASDAQ:EBAY) and more like Alphasmart and a host of companies from the late 1990s that don't exist anymore. Why is the general perception the opposite? Well, once PurchasePro and its ilk fail, they fade from memory, leaving only the huge successes to reinforce what they did.
Headline: Today, nothing happened
There are decisions that we make in our investing careers that will matter a great deal. For example, the folks who bought into Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO) in the early 1990s and held through thick and thin have done extremely well. How many people do you know in this position -- people who made a single investing decision that turned into a life-changing event? They exist, of course. But they didn't accumulate their wealth in a single day. Though the 4.4% rise in Microsoft stock on September 12, 1991, might have felt just great on that day, it quickly became essentially meaningless because of the inexorable march of time.
The difference in feeling between a stock market day 13-plus years ago and the one we had yesterday feels like the difference between standing on a mountain and seeing it from the air. In the first instance, it looks jagged and imposing; in the second, all of the contours are smoothed out. You could even raise the stakes. Consider which feels more important to you: that which happened yesterday, or that which happened in the entirety of, say, 1997.
There's a reason for this: It is much easier to recall what happened yesterday than it is to remember events from longer ago. But in the scheme of things, yesterday's results are no more important to you than the results from any other day of your investing career. In fact, focusing on what happens in any one day may actually harm your ability to generate long-term returns.
Your brain is out to get you
The reason this is so is what Nobel Prize-winning psychologist Daniel Kahneman describes as the human aversion to short-term losses. I was reminded of Kahneman's work from a fantastic 2001 article penned by Jason Zweig that was posted on the Fool's Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) discussion board. Kahneman insists that your best course of action is to make sure that your reviews of how you're doing match your time frame as an investor. If you're going to invest for 40 years, why in the world would you give a hoot how you did in the 17 minutes between 11:17 and 11:34 this morning? The only thing this checking does (and as I've said before, I'm a checker) is get you riled up. "I lost $457! Should I protect my gains by selling?"
If you think about it, limiting the amount of time that you obsess about the wiggles has to be good for your psyche. Every day, it seems, I hear some poor benighted soul wailing and gnashing teeth over some big institution "painting the tape at the close." I always think to myself, "Who, right and truly, cares?" But if you obsess over what you've done over extremely short periods of time, then it's only so natural to be really interested in what happens in the last few seconds of the day. Even if such a thing as tape painting exists (and it does, particularly close to the end of the months when funds have to report performance), it does nothing to change the value of the company.
If it goes up, sell; if it goes down, don't buy
What this obsessive checking does is give you a greater sense of control than you actually have. What it also does is, frankly, drive you insane. If you're wondering whether Krispy Kreme (NYSE:KKD) is going to survive, does it make more sense to spend your time (a) watching the stock price and rooting for it to go up, or (b) doing some extensive research into the company's financials, the background of the new management, and the company's business prospects to determine whether you believe that it has the gumption to succeed, and, further, whether the price offered today fully reflects these chances? The first path is reactive, the second proactive, and you just might to get to eat a doughnut in the process.
Do yourself a favor. Try not to check your stock prices today. Maybe go and read the Zweig article instead, since I can honestly say that it's one of the best I've read in a long, long time.
Bill Mann owns shares of Berkshire Hathaway. He wouldn't have brought it up, but heck, that IS where he saw the Zweig article. Want to hear about companies that pay you to invest? Mathew Emmert's Income Investor offers up two ideas each month of dividend-paying securities that pass his rigorous qualitative and quantitative tests. Afree trialis but a short click away.
