The Individual Investor’s Last Competitive Advantage
Decades ago, we received our financial information more slowly. Of course, this snail-mail delivery system didn’t make the information any less important. But somewhere along the information superhighway, investors as a whole have confused “real-time” with “real important.”
For example, the average holding period for any given stock is less than 2 years. This is down from 20 years back in 1949. Quicker delivery of news, lower trading costs, and a roaring bull market escalated this short term-ism in the 1990s.
Unsurprisingly, this has led to more volatile markets. Many traders got burned by the “flash crash” in May 2010, when blue chip stocks fell nearly 10% in a 5-minute span. But the long-term investor who knew that those companies’ underlying businesses hadn’t changed, the “flash crash” was a non-event.
But increased volatility and information speed still don’t change the investment merit of the asset. In fact, it may provide more opportunities for investors. Those who have a disciplined system for keeping their heads and managing emotions when making investment decisions will find plenty of opportunities within this environment. As Warren Buffet said, “I’d rather make 15% lumpy than 12% smooth.”
This leads us to two key takeaways. First, define your investment time period in advance. Long-term stock investors should be thinking about a 5-year period at minimum. Second, have a disciplined approach [link to our site] to dealing with the panics, whether it be turning off CNBC entirely or tracking the evidence of such panics to your advantage.
So take the high road with a long-term approach and avoid the back alleys of the day traders. In doing so, you’ll capitalize on this individual investor’s last remaining competitive advantage: time.