The Investor’s Worst Enemy


If I had to make a short list of the investor’s biggest enemies, one of the top slots would be dedicated to the fact that we receive stock market quotations during every second of the business day from Monday through Friday. It completely turns otherwise intelligent investors into short-term traders.

Imagine if buying a stock was something you had to earn. You know, pretend you had to hike by wagon hundreds of miles to New York every year in a sort of reverse Oregon Trail style to purchase your stocks. And for good measure, let’s pretend the stock market was only open one per year. Think about what that would do to your stock selection and screening process.

If buying and selling stocks were a burden, you would put a lot of thought into the underlying business models of the companies you select, and you would spend all your time thinking about the profits and dividends that the firm generates instead of getting excited or sad based on the fluctuations in the price of the stock itself. These are the sort of things you should be doing anyway, regardless of the fact that we receive instantaneous stock market quotes and can buy and sell securities with a mere click of a button.

Everyone refers to the 2008-2009 stock market crash as if it were some terrible thing. If you were a holder of financial stocks, it was a terrible thing. But if you owned a diversified collection of stocks across industries, you could be certain that the falling stock prices were a signal of irrational pessimism because the earnings of the great companies continued to be excellent, and in some cases, grow.

Coca Cola’s profits only dipped from $1.51 to $1.47 per share, and the annual dividend climbed from $0.76 to $0.82 per share in 2009.

Procter & Gamble only saw its profits fall six cents per share, and the annual dividend went up from $1.45 to $1.64.

Johnson & Johnson saw its earnings per share climb from $4.57 to $4.63, and its dividend grew from $1.80 to $1.93.

Wal-Mart grew earnings per share from $3.42 to $3.66 per share, and saw its dividends raise from $1.06 to $1.21.

This is why I spend my time writing about excellent companies. The stock prices, in the short term, can be all over the place—but the business performance remains sound. In the case of Coca-Cola and Procter & Gamble, the profits fell by a negligible amount, even though the price of the stock fell by over 30%. That should be a hell of a signal that it’s a good time to buy.

In the case of Johnson & Johnson and Wal-Mart, the business was actually growing more profitable as the share price plummeted. How wild is that? The businesses were getting stronger, yet you had an opportunity to buy them at a 30% discount.

That is why I believe that the daily market quotations are the enemy of an investor. Imagine if you owned 100 shares of Wal-Mart in 2008, and there were no stock quotes. At the end of 2008, you would have received notification that your 100 shares generated $342 worth of profit, and the company was going to send you $106 of it as a dividend, and save the rest to grow the business. At the end of 2009, the company notifies you that you generated $366 worth of profit, and $121 would be mailed to you. You would be perfectly content to see your business holdings grow during the worst economic calamity we had seen since The Great Depression. Yet, because we get daily quotations, a Wal-Mart shareholder would have seen the price of his stock fall over 30%, and he might be inclined to panic. That’s a shame—because with many of the excellent companies I regularly discuss, the bear market decline of the stock price is never a true indicator of the company’s underlying economic reality.

Do what you got to do to make sure that you think like a long-term business owner instead of a trader. If you own 100 shares of Coca-Cola, find a place in your house where you can keep a Coca-Cola stock certificate, a Coca-Cola dividend check, and a glass bottle filled with Coca-Cola itself. It will remind you that you are a part owner of the most powerful business on the planet. If the price of the stock falls 30%, go to the local grocery store and stare at the five hundred different brands that Coca-Cola owns and sells in stores across the entire global allowing the company to generate $10+ billion in profit across 207 different countries. Make sure that you never associate a stock price with a company’s true value. It is up to you to look to the company’s underlying business performance and make a determination of what it is worth.

If you had to make a journey to buy a stock, pay hundreds of dollars, and could only trade it once per year, you would think like a long-term owner, and be rewarded as such. Instead, we live in  world where you can roll out of bed, fire up the laptop, visit your brokerage website, and undo years and years of steady accumulation in an excellent company simply because you were having an off day. Your obligation is to position yourself in such a way that you never give in to emotion. I don’t care what you have to do to pull it off, but take active steps to make sure that you are thinking from the perspective of a long-term owner. Even if it absurdly involves going to Wal-Mart to fondle the Coca-Cola bottles,  being weird is a small price to pay in exchange for preserving thousands of dollars worth of your hard-earned wealth.


Originally posted 2013-07-07 08:28:56.

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5 thoughts on “The Investor’s Worst Enemy

  1. 0503%oma says:

    Great stuff! I have been recommending Tim's dissertations to my kids who have their own families and are investing for their future.

    1. Tim McAleenan says:

      Hi Jon, welcome! No, I have not done that–but I'm working on a "Master List" to get up on the site by the end of the month.

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