Let?s start by clearing up any confusion. Yes, the title (derived from an unknown source) is written tongue-in-cheek. With the first week of the new financial year over, there has been plenty of discussion around the volatility of the first few days. Motley Fool Analyst Scott Phillips put it eloquently when he wrote last week that there?s been ?Lots of movement, no progress.?
For long-term investors, lots of movement is the exception rather than the rule. While billions of dollars race in and out of the market each day as speculators try to escape a falling market and jump…
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Let’s start by clearing up any confusion. Yes, the title (derived from an unknown source) is written tongue-in-cheek. With the first week of the new financial year over, there has been plenty of discussion around the volatility of the first few days. Motley Fool Analyst Scott Phillips put it eloquently when he wrote last week that there’s been “Lots of movement, no progress.”
For long-term investors, lots of movement is the exception rather than the rule. While billions of dollars race in and out of the market each day as speculators try to escape a falling market and jump aboard the next rise, long-term investors quietly and patiently ply their trade. This long-term approach has been shown in many studies to be a much more lucrative way for investors to progress. The long-term approach involves spending more time researching and analysing potentially profitable long-term investment ideas and less time worrying about the latest ‘market noise’.
Research and analysis is what investors like Warren Buffett do every day, and in Buffett’s case he’s been doing it for over half a century. Each day Buffett speaks to knowledgeable business people, he reads, he thinks, he considers valuations and he discovers insights and opportunities that ‘the thundering herd’ miss.
Of course no matter how many times we might Foolishly suggest that less movement may lead to further progress, there will always be people who prefer to buy and sell constantly. If all participants were long-term buy and hold investors who had the mind set of being a part-owner of a business then a day with no trading could well be imagined.
In reality though, many participants are buying and selling blips on a screen. This can offer at least two benefits to long-term investors. First, we can make use of the volatility when it offers us appealing prices. Second, we can look for companies that stand to benefit from people’s desire to trade.
Companies that rely on trading volumes — such as Australian Securities Exchange owner ASX (ASX: ASX) as well as stock brokers including Bell Financial Group (ASX: BFG) and Wilson HTM (ASX: WIG) — stand to benefit from an uptick in trading which will likely occur as memories of the Global Financial Crisis fade. With the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) up 17% last financial year, people who have been sitting on the sidelines will no doubt be getting anxious to join the ‘buy and sell’ party.
Benjamin Graham, in his renowned text The Intelligent Investor, once cleverly represented the stock market by a man named Mr Market. Mr Market was a neurotic sort of fellow, whose mood could fluctuate daily between the extremes of optimism and pessimism. This resounding feature of Mr Market’s personality was complemented by a work ethic which saw him turn up every day ready to offer buy and sell quotes at whatever price his neuroticism dictated.
The moral of the story is that Mr Market can be used from time to time to an investor’s advantage — when the price offered is appealing — but day to day, let the neurotic maniac go on his merry way.
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Motley Fool contributor Tim McArthur owns shares in Bell Financial Group and Wilson HTM.