Why Novices are Beating You in the Market
by Brian Lee. (Visited 2203 times) (one comment) :: Print This Post
Posted: February 28th, 2007 under Investing, Personal Finance, Stocks.
A funny thing happens when you decide to put some work into stock market investing:
While you may have been getting decent results before you started paying more attention by picking a few index funds and forgetting about them; now that you are doing your homework
it seems the harder you try, the worse you do.
Naive and blissfully ignorant coworkers start beating you in the market. After all of the hours you have spent reading about stock market investing, you want to pull your hair out
when the intern is getting a 20% return while you are down 20.
The good news is that this cycle doesn’t have to last forever. It’s not until you have mastered your craft and put in a sufficient amount of due diligence that you start to see a return on your investment of time.
Why does this happen? It can be frustrating to struggle in the market, even though you are trying hard, while your totally uninterested friends outperform you. Is it just beginner’s luck?
Emotions
The first part of the problem has to do with your emotions. Back when you didn’t care, you were just blindly putting a certain percentage of your paycheck into a mutual fund by automatic withdrawal.
After you made the decision of what percentage and which funds, you didn’t have to think about it again. A completely emotionless computer automatically carried out your investment wishes each month without consulting you.
As soon as you started to tinker with your investments, your emotions began to play a part. Now, instead of a consistent buy on the first and fifteenth of every month, your buy and sell decisions were influenced by how you felt about the market. Your two worst enemies as an investor: panic and euphoria, took a perch on each of your shoulders.
(for more on how your emotions influence your investing, read Keep your Cool in Stocks and Dating.)
As emotions become a greater force in investment decisions, performance in the market dwindles.
The Market is Probably Smarter than You
Did you know that approximately 3/4 of mutual fund managers do not outperform the S&P 500? (The S&P is sort of a representation of the market as a whole.) WHAT? When I first heard this, I couldn’t believe it.
If even most of the professionals fail to outperform the market, what chance do we have as home investors? Many people have concluded that this is a great reason to invest in index funds. They are easy to keep track of, and almost guaranteed to outperform most mutual funds.
People who invest in index funds don’t need to think about their investments. They just make an automatic deposit each month and forget about it. The amount of effort they put into their investments is extremely low. When these same people start to tinker with their portfolio and try to outperform the market, they come up short.
Information Overload
Another reason that effort diminishes your stock market returns is that there is too much information about the market for you as a part-time stock investor to process on your own. It takes a lot of work to build up the knowledge required to beat the market. Until you get to this point, most of the information you are absorbing just hinders you.
When Effort Finally Pays Off
If you can learn from your mistakes, continue to work hard, and with a little bit of luck, you will eventually turn the corner. After months, or years of due diligence, you finally learn how to control your emotions. After studying the investment philosophies of the masters, you carve out your own. You learn bits of wisdom such as: it’s not so much which plan you go with, it’s that you finally commit to one plan.
So What are We Supposed to Do??
The moral of the story is this:
if you aren’t committed to the time and effort needed to become an expert investor, stick with low-maintenance, effortless investing.
Half-ass investing only hurts your performance. Trying to pick stocks without doing your homework can get you into big trouble. Save yourself the effort and heartache and automate your investing.
On the other hand, if you are willing to focus your energy on learning how to invest; you can make yourself a lot of money, but not before you dredge through that initial slump. Part of your hazing process on the way to the top will be some massive failures at the beginning, but don’t quit!
What doesn’t kill you in the stock market makes you stronger.
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