This article appeared first on The Stock Market Blueprint Blog.
If you’re an investor wanting to gain an advantage in the stock market, the best thing to do is ignore your stocks.
When you ignore your stocks, you eliminate any chance of overreacting and making bad decisions.
The Little Giants
There’s a memorable scene in the movie The Little Giants. John Madden and some NFL superstars are on their way to Canton, OH when they stumble upon the Little Giants preparing for a big game against the town rivals.
The Little Giants aren’t acting like much of a team and are in desperate need of some encouragement.
After an inspiring afternoon of bonding, the Pros begin to pack up and continue on their way when one of them says, “Just remember, football is 80% mental and 40% physical.” While the irony of the poor math is humorous, the point being made is that success is all in your head.
This truth plays out in the stock market just as much as in sports. Investors who have the ability to remove emotions from their decisions and ignore the noise associated with the wild swings of the stock market have a huge advantage over everyone else.
Price fluctuations in the stock market are a reality. Huge changes can occur in a matter of hours and do occur countless times over the course of several years.
Human nature makes it natural for investors to get emotionally stressed during volatile periods. We become ecstatic when prices move up, and we panic when prices move down.
Most people let these emotions take over and inadvertently make poor decisions. Investors who are not fazed by the ups and downs of the stock market can ignore irrelevant price movements, while taking advantage of everyone else’s greed and fear.
In The Intelligent Investor Benjamin Graham says:
“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”
When stock prices are not providing an opportunity to be taken advantage of, they should be ignored.
Ignore Your Stocks
Between the dozens of financial news channels and the thousands of smart phone apps available for download, people have the ability to check stock quotes 24/7. The problem with this is that stock prices change much quicker than company fundamentals do.
Investors who buy fundamentally strong businesses will only drive themselves crazy by checking stock prices daily, weekly, or even monthly.
Imagine if a homeowner had the ability to check the appraised value of his house at any second of the day. He would feel like a genius when the price goes up and begin to worry sick when the price goes down.
Even after recently experiencing the worst housing market in recorded history, most individuals view real estate as both a safe and good investment.
It’s a safe assumption that investors would think differently about real estate if there were constant ticker quotes telling them what their homes were worth at any given moment.
To avoid the temptation of trading when he shouldn’t, Spier limits himself to checking his stocks no more than once a week.
To convey how irrational the market can be, Benjamin Graham wrote a parable called Mr. Market.The parable describes a metaphorical business partner, Mr. Market, who represents the opportunities individual investors receive from the stock market at any given time.
Some days Mr. Market is dreadfully pessimistic about the business’s future and will sell his shares for much less than they’re worth. Other times he’s filled with enthusiasm and will pay tremendously high prices to buy all his partner’s shares.
Staying rational when Mr. Market is not prevents the destructive behaviors associated with missing out on opportunities and underperforming the entire market. According to Graham:
“The most realistic distinction between the investor and the speculator is found in their attitude toward stock market movements.”
Do Yourself a Favor
Investors who don’t allow emotions to dictate their decisions have a tremendous edge over speculators who share in Mr. Market’s panic and euphoria. Give yourself the advantage and ignore your stocks as much as possible.
Limit the amount of times you check your stock quotes. Whether it’s once a day, once a week, or once a year, removing impulsive behavior is a step in the right direction.
Mitchell Mauer is the Founder of TheStockMarketBlueprint.com. The Stock Market Blueprint is a site that finds value stocks for investors building long-term wealth. The site’s investment philosophy is anchored in principles established by Benjamin Graham and his most reputable followers over the last 100 years.