The stock market has elements of professional sports. Highs and lows, all-stars, winners, losers, excitement, disappointment and everything in between. Unlike professional sports, this is a game where it pays not be “part of a team” but instead, an independent observer. The sports game mentality is what gets people in trouble.
“Boring” is Good
Many market participants don’t think about markets for what they actually are. The stock market is where firms go to raise capital, and after that, a place for exchanging ownership interest in these now public companies. Most people don’t think of themselves as owning a business. To them, it’s just a number on a screen that fluctuates. They get excited when their stock rises, and depressed when it falls. Completely natural behavior. But good investing is actually “boring”.
Watching Paint Dry
People really despise seeing other people make money. Especially if they think the other person is dumber than they are. Envy drives stupid behavior and FOMO will get you trapped in all your biases.
“Wall Street makes money on activity. You make money on inactivity.” -Warren Buffett
The only entity that gains from market activity is the middle man. The one who takes a slice of every transaction. Thus, it is in their interest to drive activity. More activity, more transactions, more fees to collect. As a retail investor, the more active you are, the more likely you will make mistakes. Sometimes big ones. Avoid these mistakes by taking the mindset of watching paint dry. Because that’s what good investing is.
Opportunity Comes to the Prepared
Life doesn’t give you endless opportunities. So why should the stock market? Over the course of a lifetime, you will get a handful of opportunities that will have significant impact on your life. News of stocks hitting new heights gives the illusion that picking winners is easy. It’s not. Any fortune that started from nothing has taken a long, long time to build.
Since life only gives a handful of opportunities, we want to maximize these. And the only way to do it is to invest in yourself. Opportunities come when you least expect it. This applies to the market as well. You don’t need to explicitly look for investments, even if you have the money. It’s better to take your time, you’ll be glad you did. Most of the time, we’re not smarter than the market. Yet most of us think we’re smarter than everyone else. Accept that it’s OK not to be smarter than the market (most of the time). Accept that most businesses are not undervalued.
The good news is that though this is the case most of the time, it’s not all the time. There will be occasions where you will have superior insight, timeframe or other advantage. But the key is knowing the boundaries of your competence. Good investing is sitting watching paint dry. You sit there, keeping your eyes open and wait. And wait. And wait. And seemingly out of nowhere an opportunity comes that is “screaming” at you. A business you understand, with a competitive advantage, with management you like and for a price that gives a margin of safety in case you are wrong. You’re much better off owning five companies with these characteristics than diversifying into twenty firms with varying characteristics. If you pick individual stocks, don’t be a closet indexer.
Channeling Your Excitement
If you’re passionate about value investing, your excitement doesn’t come from market noise. The excitement comes from the individual businesses you own. You regularly check the firms filings, weekly at the least. You regularly search for any news or updates on the firm or industry based on facts, not analyst opinions. You can’t wait till the latest 10-Q drops, to see how the business is doing. Shareholder letters, annual and quarterly reports are like relatives who lives in a different city. You see them a handful of times a year.
Meanwhile, as you patiently wait for the next filing from the firm, you should spend your time reading. Investing in yourself will give the greatest returns.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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