It is often said that investing in the stock market is simple but not easy. What one needs to do to enjoy investing success is simple: buy good companies at fair valuations and hold for the long term. However, executing this strategy is not easy. Why?
The reasons are mainly to do with human nature and some are discussed below.
Desire for Quick Gratification
To succeed at investing the simple way, we need a long-term view. Unfortunately most of us prefer quick gratification. Waiting 5 to 10 years to enjoy the fruits of our labor is just not in our nature. It therefore requires tons of discipline and patience to invest consistently the simple way. These are also in short supply.
Low Pain Threshold
Another reason is that we have a low pain threshold and hate pain more than we love pleasure. Therefore, in volatile market conditions, which are common these days, we tend to loose our nerves at the worst possible time; after a sharp decline.
Furthermore, even when markets stabilize, our fear of pain paralysis us from taking advantage of low valuations. We tend to rush back in when the upward swing is more than half way done. Which leaves us with a double whammy, losses on the way down and no gains on the way up.
Desire for the Latest Fad
Finally our desire for the latest investment fads and exiting stories makes it difficult for us to select a good, stable, dividend paying but dull company. We would rather chase the latest fad, the next apple or penny stock dreaming of stupendous gains.
What to do
So what can we do to escape this difficulty and execute a simple investing strategy with ease?
First we need to accept that investing is a marathon and not a sprint. Next we need a plan. Write down why you are investing, what do you intend to achieve and how long you need to keep at it.
With this is mind, take your time to choose quality companies at fair valuations. If you miss the current bus, another one will surely arrive. Therefore, be patient, do not chase up over valued companies.
Invest consistently, preferably monthly. If possible, set up an automatic monthly transfer to your brokerage account.
Review your investments no more than once a quarter, when quarterly results are released. This will ensure you miss noticing most of the volatility. Sell only when it is clear company fundamentals have deteriorated and management has no clear idea and plan on how to get out of the rot or when you have reached your goals. Outside of these, stay invested even if the world seems to be coming to an end; if the world is truly ending, your investments should be the least of your worries.
Have a long-term view, invest consistently in good companies at fair valuations, stay put through the volatility except if fundamentals are in permanent decline or you have reached your goals. Simple and easy!