How to Be a Happier Investor
Kids don't always have the best timing. They chase a ball instead of going to where it will be. They get the cool Iron Man shirt five months too late. They run away from the tire swing only after someone gets hurt. The other day, I saw a kid running through a waterpark feature at just the wrong moment, missing the bucketful of falling water time and again. Instead of waiting for the next fall, he'd run back to his mom to start the process over again.
Sometimes we all feel like these kids -- jumping on a hot stock, selling on a little bad news, following the talking heads, and trying to time the market. But there are some ways we can grow as investors and put our market timing youth behind us.
Turn off the TV
One of the biggest annoyances in the market is its constant stream of banter: "Dow Up on Greece Outlook," "Dow Down on Greek Failures," "Dow Sideways on Cheese Futures," "S&P III: Return of the Sith." Every day there's a new reason to make or lose a fortune, and they're all hogwash.
Financial news does what news has always done: make things more important than they actually are. That's because if the media covered things based on their relevance to the world, we'd only ever have broadcasts on dull things like elections and poverty. Things happening now are fun and involving and terrifying. But by listening to these things, we lose our collective mind and make bad decisions that end up hurting us.
Instead of focusing on the talking heads, make your own decisions. Read the SEC filings of companies you're interested in. Start with cash flow, debt, and price, and then dive in to see whether you think they have a chance to grow. Once you buy a company, ignore the daily update of who said what and why the market moved. As long as the fundamental reasons you invested haven't changed, there's no reason to make a move.
Trust your analysis
To illustrate how this can really help your stress level, let's look at Under Armour's 2012 performance so far through the eyes of two investors. One works as an engineer and looks at the stock every day, waiting in the hopes of buying and selling at precisely the right time. The second works as a waiter who has no time during the day to watch stocks. Instead, he looks every now and then to make sure the fundamentals haven't changed. Take a look at the different way they perceive the same stock movements.
Source: Google Finance historic data.
Both investors get the same return and bore the same risk, but the waiter had the benefit of a smoother emotional cruise up the market. On the other hand, the engineer has had a bumpy ride. Every bump is a reason to fret about buying, selling, or holding. Instead of reveling in his gains, he's had six months of stress.
Read the important stuff
This isn't to say that you can just buy a stock and walk away. When things happen that seriously damage the underlying premise for buying a stock in the first place, you should get out when the getting is good.
The plight of Green Mountain Coffee (NAS: GMCR) serves as an excellent example. The company has been plagued by bad accounting and expiring patents. If you had invested in 2010, you couldn't have foreseen these problems. The young company seemed to be firing on all cylinders, and the stock muscled its way up to more than $100 last year.
Now Green Mountain is down below $25, and investors who just put it in the portfolio and walked away are suffering. The reason that panic was called for was the nature of the news. It exposed fundamental flaws in the business that changed the investing thesis.
In order not to get caught out by these changes, investors need to focus on the most important events and information that affect their portfolios. SEC filings are a great place to start, but don't ignore new product launches or mergers; they can have huge long-term impact on companies. Investors should be looking for any news that affects their original investing thesis.
Hold onto that feeling
Yet in the absence of news that affects your investing thesis, the final, most difficult word of caution is this: Don't sell too soon. This is the hardest thing to do -- to watch a stock drop for no reason and hold on. To watch it rise for all the right reasons and not sell. This is where I am most clearly segregated from the world of value investing.
The companies that become the biggest multibaggers constantly look like they need to be sold off. You could have picked up Chipotle (NYS: CMG) shares for anything from $40 to $200 between 2008 and 2010. Chances are there would have been half a dozen points at which the burrito chain surpassed its originally determined "fair valuation." It would only have been by holding through those points that you'd now be holding onto a potential 10-bagger.
Again, the key is to trust your original investing thesis. If you think Chipotle is no longer doing what you imagined it would and things have changed in a meaningful way, then it might be time to get out -- even if that means missing out on more gains. If you're happy with Chipotle's business and filings, then you should be hanging in there. Look back at your original research and see what, if anything, has changed.
The "dollars and cents" difference
Can you make money as a successful market timer? Of course you can, but Fool writer Brian Stoffel has an excellent piece showing how little you actually get for all your hard work. To summarize, timing the market can give you a slightly better return. But you have to do it perfectly, and even then, a lack of dividend-paying stocks can hurt your portfolio.
With the world going crazy, it can be hard to keep all these things in mind and maintain a level head. But if you can remember these three rules, you'll be in a much better -- and, hopefully, happier -- place.
If you're looking for great companies whose potential will have you beaming, check out the Fool's top stock pick for 2012. It's free to read about, and it could really help you get set up for stress-free success. Get your copy of our free report now.
At the time this article was published Fool contributorAndrew Marderdoes not own any of the stocks mentioned in this article. He does like waterparks. The Motley Fool owns shares of Under Armour and Chipotle.Motley Fool newsletter serviceshave recommended buying shares of Under Armour, Green Mountain Coffee Roasters, and Chipotle, as well as creating bear put spread positions in Under Armour and Chipotle and a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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