Successful investing: 'Who Cares?'

About Latest Posts Scott PhillipsScott Phillips is The Motley Fool's Chief Investment Officer in Australia. He is Advisor of The …

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With only 8 trading days remaining in 2011, many investors can't wait to see the back of what has been another tough year for shares.

The S&P / ASX 200 finished 2010 at 4745 points, and there were high hopes that the worst was behind us. Almost 12 months later, we find ourselves around 600 points lower, and still waiting for the bad news to end.

It's been something of a cruel year, with hopes of recovery dashed repeatedly as rally after rally promised better times ahead, only to be erased by subsequent falls. Volatility has been the name of the game, and in the wash-up, the market as a whole is likely to finish the year quite a bit poorer than at the beginning.

It's all about you
In investing, as in life, your level of success is often greatly influenced by your reaction to circumstances. No, attitude alone isn't enough to change the direction of the market, but your responses to the 'slings and arrows of outrageous fortune' do matter.

History gives us every reason to be confident – the long term average return from shares over the last century or so is around 11%. That is, even if you simply tracked the average, your return has been in the double digits. Some people will tell you 'this time it's different' – exactly what others said in the face of two World Wars, numerous other conflicts, a Great Depression, oil shock and persistent stagflation.

It's hardly ever different
Just like the economists who've predicted 9 of the last 2 recessions, the 'this time it's different' crowd have yet to be proven right. It might happen one day, but I'm not prepared to bet against a history of double digit returns.

If you can accept that thesis – that over the long term, shares are likely to be the best place for your money – then the battle is with yourself, as much as (and perhaps more than) it is with other investors or the market as a whole.

There's a solid case to be made that investors are often their own worst enemies.

The itchy trigger finger
We investors make a litany of mistakes. Chief among them are the twin sins of over-trading (and getting decimated by commissions) and short-term holding periods that rob us of the taxation benefit of the long-term capital gains tax discount.

The traders will make the case that there are gains to be made from short-term trading. Maybe that's the case, but I'm not convinced that any such strategy works consistently, let alone offsets the commissions and higher taxes.

When they fake left, go right
Even the most rational investors struggle to stay relaxed in a gyrating market, but that's exactly what we should do. Even more importantly, we should seriously consider acting counter to the prevailing market mood.

At one point in the 1990s boom, books were being written about a structural change to financial markets that would allow shares to trade permanently higher. We know how that worked out, and it should have been a signal to sell, or at least seriously reconsider our plans to buy more shares.

Nothing worthwhile is ever easy
Equally, the deepest gloom likely presents us with golden opportunities to lock in outsized gains over the medium and long term.

Don't get me wrong, it's exceedingly hard to buy when others are running for the exits, but our markets (both here and overseas) have consistently oscillated between over and under-valued and back again, presenting patient investors with regular opportunities to pick up shares on the cheap, but also periods of time during which it was difficult (but not impossible) to find good opportunities.

Who cares?
Next time you read about share movements over the previous day, week or month, do yourself a huge favour and repeat after me: 'who cares?'

Not because it's easy, and certainly not because it's not real money – it certainly is.

Instead, 'who cares' simply means that we know shares will jump around for every reason and none in the short term, but also that decades of experience suggests that as company profits grow over time, share prices rise with them. Not in a straight line, and not without bouts of pessimism, but rise they do.

Foolish take-away
As we get to the end of the year, do yourself a favour. Stop checking your online brokerage account, and stop obsessing about yesterday's and tomorrow's market moves. Ignore the 'get rich quick' crowd and resist the urge to jump from idea to idea and back again.

Instead, invest in well priced, well run companies with bright futures and stay the course. Once you've bought well, ignore the bumps. To invert the well worn phrase – 'don't just do something, sit there'.

Are you looking for quality stock ideas? Readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

Scott Phillips is The Motley Fool's feature columnist. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson

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