Fool.com columnist Morgan Housel hit the nail on the head when he said, “99% of long-term investing is doing nothing; the other 1% will change your life.”
The number one problem with long-term investing is many of us don’t have the mental toughness and stamina to look away from our brokerage accounts for more than a few days at a time. We get drawn back to the accounts by news stories exclaiming “S&P down by…” and can sometimes make irrational decisions such as selling when we’re at a loss, only to see the stock climb higher the next day.
Over time, the best investors in the world have notched-up superior gains controlling their emotions. For example Warren Buffett once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Be confident and know
Undertaking research and reading through years of annual reports and company announcements is mentally intensive and, at times, exhausting although it does make us better investors.
Knowing why Commonwealth Bank of Australia (ASX: CBA) and BHP Billiton Limited (ASX: BHP) might not be a ‘buy’ at current prices decreases the chances of losing money. However, the most important thing that the hours and hours of research does is to build our confidence.
If we’re confident in our decision making, the chances of partaking in irrational trades are significantly reduced because we know what the company faces in terms of risks and what its true potential is. That’s why some of the best investors choose not to hold too many stocks in their portfolio because it’s impossible to have a thorough understanding of every company.
Peter Lynch summed it up nicely when he said: “Owning stocks is like having children – don’t get involved with more than you can handle.”
The perfect example
One of the most widely held Australian stocks is Telstra Corporation Ltd (ASX: TLS). Partly because when it comes to dividend payments it’s second to none and with 100% franking, there are obvious benefits to holding such a stock inside or outside of superannuation.
However, like almost any company, there are some blemishes on Telstra’s balance sheets. Its Sensis business has been unable to adapt to the disruptive changes posed by the internet and who uses home phones anymore?
If you own the stock and don’t know why, recent news of Sensis’ mass layoffs would be reason for you jump back into your stock account and reassess your holding. If you didn’t hold it, nor know the company very well, chances are you’d be sceptical of its ability to grow stronger in the future.
All of a sudden the 1% of long-term investing just turned into 10% and the chances for it to damage your wealth has grown considerably.
Missing the opportunity
You see, Telstra’s more than just a home phone and directories business. Its expansive copper network is an incredible asset, it has a rapidly growing international division, controls both the mobile and fixed internet markets and has a dominant cloud computing and networked services division. It also has billions of dollars in cash.
The current share price ($5.08) could look like a bargain in years to come, particularly once payments from the NBN Co start flowing into shareholders’ pockets. What’s more its brand power and reputation amongst Australian customers is unrivalled, meaning investors won’t need to become concerned and check their brokerage accounts whenever the company appears in the news.
The strategy is simple. Buy and hold investing is the best way to grow your wealth in the long-term. To do it, take these successful investors’ words on board and minimise your chances of making irrational decisions in times of uncertainty.