You know what makes stock investing so dangerous? The fact that we can instantaneously combust a long-term strategy merely if we are having a bad day. The amount of damage we can wreck on our portfolios in under five minutes simply by logging onto a computer account is absolutely crazy. That is why I favor stock certificates, because it is a great way to build some friction and resistance between yourself and the stock you are trying to sell, as well as make it easier upon yourself to remember that you are a long-term owner of your stock.
A couple generations ago, it was very difficult to switch positions rapidly. You had to call up a broker and place a round lot (100 share increment) order, and most importantly, you had to pay a commission fee in the several hundreds of dollars. For a young professional just getting started with their investing, it was not unrealistic to face fees of 5% to 10% of your total investment amount. With fees like that, you had to be a long-term investor whether you liked it or not, because otherwise, the fees would kill you.
The advantage of that system is that all of your stock purchases were more likely to be well thought out and deliberate. If you are going to pay $200 in fees to buy stock, you are going to spend a lot of time thinking carefully over what stock to purchase. Nowadays, when you could buy Coca-Cola, sell it to buy ExxonMobil, sell that to buy Pepsi, sell that to buy General Mills, and then sell that to buy Coca-Cola again all in the same day for under $100, it is easy to get distracted from long-term investing principles.
That is why I find Warren Buffett’s allegory about the “twenty hole punches” to be so inspirational. For those of you unaware, Warren Buffett told a group of business students at the University of Florida to pretend that they had been handed a “hole punch card” at the beginning of their investing life that only allowed them to make twenty purchase decisions over the entirety of their life. The purpose of that Buffett allegory was to get you thinking about excellent businesses bought at value prices. Additionally, you would be making decisions with ten, twenty, thirty years in mind because you are not even allowed to make two dozen investment decisions under that hypothetical construct.
If you owned the local Laundromat that was worth $100,000, you would have to jump through a lot of hoops to sell it. Yet, with publicly traded common stocks, we can just sit by a computer, punch a few buttons, pay a $10 fee, and be done with it. That is scary. You could spend twenty years accumulating shares of Coca-Cola, have a bad day, and sell it all. In my case, I always keep a company’s financial figures in a readily accessible place to remind me that I am dealing with a real business. I know that each ownership unit of Coca-Cola represents $1.90 in profits, $1.12 of which will be mailed to me as a cash dividend. That is always at the forefront of my mind. That is the fact I am constantly drilling into your head. If you can get in the habit of always thinking in terms of business performance, you can seek shelter from the storm of impulse selling. That is usually where dividend checks come in handy, because you can see the money entering your account every ninety days reminding you of the valuable assets you have on your balance sheet.
Originally posted 2013-08-07 08:25:08.