Different Strokes for Different Folks
It is difficult to compete in the stock market because information and trades go astronomically fast. Instead, our best bet is to buy and hold stocks for long periods of time where we can profit from the long term value of productive companies. However, just because we don’t compete in the high speed, cut throat short term trading of stocks, that doesn’t mean we are immune from its effects.
Which leads to the second key point people need to understand if they want to invest. There are millions of participants in the stock market, most of whom have very different goals and perspectives than you.
But the person sitting in an office or basement day trading (which is trying to make money by buying and selling multiple times per day) inhabits the very same market as those who are passive, or “buy and hold”, investors.
We watch the values of our accounts go up and down as stocks trade daily. And although we typically don’t need to sell stocks on any given day or month, we are still highly aware of how the fluctuations in value affect the value of our money and therefore our perceived freedom in the future.
But all of those millions of stock market participants have different reasons for trading stocks. One person sells 1,000 shares of company XYZ because he suspects the CEO of the company is going to retire soon. Another person buys 5,000 shares of ABC stock fund because he’s excited about the prospects of a federal payroll tax holiday. Another family sells 5% of its holdings in the LMNOP fund because it wants to use the proceeds to pay off their mortgage. Another man buys 100 shares of company X and then sells it 5 minutes later because his technical charts signal for him to do so.
These people have different reasons to trade but all trade in the same market, and every trade affects the value of the stock price. And this happens on repeat millions of times per day. And we “feel” every price movement if we watch the value of your accounts. However, nearly all those trades and price movements are completely irrelevant to your long term goals and the reasons you invested in the first place.
You may be tempted to make choices about your investment based upon all of these irrelevant price movements. And if you give into the temptation, you find that your long term goals will likely be thrown off course. Don’t sacrifice your goals simply because other investors in different parts of the world with different goals traded stocks for reasons that are unknown and matter little to us.
There are thousands of different types of investors. You are one of those types. And I hope your type is the one who makes sound, long-term investment decisions based on a plan. But always keep in mind, you are trading and participating in the same market as all those other types of investors. Don’t be swayed by the noise and price swings caused by those other types. Stay focused on what matters and what you control, and the best will be yet to come.