Most investors suffer from a short-term "get rich quick" focus. Virtually all of the studies that investigate individual investor results find that individuals badly lag the market, and one of the biggest culprits is over trading.
Other studies show that less than 10 percent even turn a profit, much less make a killing in the frantic buying and selling activities. The media sells the image of the trader as a superstar and the public buys into the myth.
The truth is that the stock market can build wealth and even make you rich, but it's a go-slow approach that makes money. Buying businesses at cheap prices when they are out of favor and market conditions are poor and selling them when they become popular in-favor stocks in a bull market is the almost sure way to wealth in Wall Street, but very few use this approach anymore.
Instead, investors swing trade or switch around among the hot stocks and funds of the day and as a result, make far less money than statistics and economics tell us they should.
The Tale of Mr. Womack
Back in 1978, market observer and money manager John Train wrote an article for Fortune magazine titled, How Mr. Womack Made a Killing. The article should be mandatory reading for investors who seem to have an almost desperate need to learn how to buy low and sell high.
The article tells of a young investor meeting a man who never on balance had lost money in the stock market. In fact he had made quite an enormous amount of money over the years. The investor was not a fund manager or trader of great renown, but a farmer who grew rice and raised pigs.
Mr. Womack had a simple approach to the stock market. When he read in the papers that the market was down and the pundits of the day were predicting further collapse and calamity, he would take a break and sit down with a copy of the Standard & Poor's Stock Guide. He would find a bunch of solid dividend-paying companies with strong financials that had dropped to single digits and drive into town and buy a package of them. If they fell a bunch more, he would add to his package.
When he was done buying, Mr. Womack went back to the farm tended the fields and fed the pigs and did not spend much time thinking about stock except to cash his dividend checks. In a few years' time when the daily paper was full of exciting comments about the stock market and predictions of eternal prosperity, he would drive back into town and sell all his stocks.
Buying Stocks Like Tending a Farm?
He didn't spend a lot of time trying to decipher mysterious patterns on price charts. He didn't sit up all night trying to develop multi-factor models to predict the direction of stock prices. He was too busy around the farm to obsess about quarterly earnings and daily market forecasts.
He bought solid businesses at very good prices and then waited for the value of the company to be fully realized in the stock market. He viewed stocks as like farming. There is a time to buy, a time to sell and a time to do nothing.
It is the doing nothing that seems to be the most difficult for investors. The casino is open, stocks are trading, there is noise, there is excitement. "I must do something," seems to be the thought process of many investors. It is an attitude that is very much promoted by the media and the brokers. The idea of buying stocks in a panic and selling in a boom and doing nothing in the interim does not sit well with most people, but it is exactly the approach that affords them the best chance of investment success.
Investors Need to Learn to Think Like a Farmer
Mr. Womack told his young friend that stocks were much like pigs. If he could buy them when prices were depressed and keep them until market prices were much higher, he stood to make much more money from his farming operations.
Bonus stocks do not need to be fed and pigs do not pay dividends. If you want to make money in the stock market, you might want to start farming and stop trading.
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest.
Other studies show that less than 10 percent even turn a profit, much less make a killing in the frantic buying and selling activities. The media sells the image of the trader as a superstar and the public buys into the myth.
The truth is that the stock market can build wealth and even make you rich, but it's a go-slow approach that makes money. Buying businesses at cheap prices when they are out of favor and market conditions are poor and selling them when they become popular in-favor stocks in a bull market is the almost sure way to wealth in Wall Street, but very few use this approach anymore.
Instead, investors swing trade or switch around among the hot stocks and funds of the day and as a result, make far less money than statistics and economics tell us they should.
The Tale of Mr. Womack
Back in 1978, market observer and money manager John Train wrote an article for Fortune magazine titled, How Mr. Womack Made a Killing. The article should be mandatory reading for investors who seem to have an almost desperate need to learn how to buy low and sell high.
The article tells of a young investor meeting a man who never on balance had lost money in the stock market. In fact he had made quite an enormous amount of money over the years. The investor was not a fund manager or trader of great renown, but a farmer who grew rice and raised pigs.
Mr. Womack had a simple approach to the stock market. When he read in the papers that the market was down and the pundits of the day were predicting further collapse and calamity, he would take a break and sit down with a copy of the Standard & Poor's Stock Guide. He would find a bunch of solid dividend-paying companies with strong financials that had dropped to single digits and drive into town and buy a package of them. If they fell a bunch more, he would add to his package.
When he was done buying, Mr. Womack went back to the farm tended the fields and fed the pigs and did not spend much time thinking about stock except to cash his dividend checks. In a few years' time when the daily paper was full of exciting comments about the stock market and predictions of eternal prosperity, he would drive back into town and sell all his stocks.
Buying Stocks Like Tending a Farm?
He didn't spend a lot of time trying to decipher mysterious patterns on price charts. He didn't sit up all night trying to develop multi-factor models to predict the direction of stock prices. He was too busy around the farm to obsess about quarterly earnings and daily market forecasts.
He bought solid businesses at very good prices and then waited for the value of the company to be fully realized in the stock market. He viewed stocks as like farming. There is a time to buy, a time to sell and a time to do nothing.
It is the doing nothing that seems to be the most difficult for investors. The casino is open, stocks are trading, there is noise, there is excitement. "I must do something," seems to be the thought process of many investors. It is an attitude that is very much promoted by the media and the brokers. The idea of buying stocks in a panic and selling in a boom and doing nothing in the interim does not sit well with most people, but it is exactly the approach that affords them the best chance of investment success.
Investors Need to Learn to Think Like a Farmer
Mr. Womack told his young friend that stocks were much like pigs. If he could buy them when prices were depressed and keep them until market prices were much higher, he stood to make much more money from his farming operations.
Bonus stocks do not need to be fed and pigs do not pay dividends. If you want to make money in the stock market, you might want to start farming and stop trading.
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest.
