Doc's note: I like to prepare for whatever the market might do. That's why I always have an exit strategy with every single recommendation I make: using a trailing stop. And there is no better way of tracking your trailing stops – and potentially significantly improving your returns – than with our affiliate company, TradeStops.
That's why today I'm sharing an essay from TradeStops founder, Dr. Richard Smith. Richard explains how doing less with your investing can actually help you make more money.
Would you like to do less and make more?
In almost any area of life and business, the answer to that question is a no-brainer.
Unfortunately, when it comes to investing, most people seem to want to "do more and make less." That, at least, is what the evidence suggests...
Overtrading is one of the cardinal sins of the individual investor. I've known this for a long time now... ever since I read the seminal paper "Boys Will Be Boys" by Brad Barber and Terrance Odean, published in the Quarterly Journal of Economics way back in February 2001.
In that important paper, the authors had access to the real brokerage-account history of 78,000 households. That's the kind of data set I love. It's real data on real investors and their real decisions.
Here is a representative example from their findings, published in Bloomberg Personal Finance in May 2000:
The more actively investors trade, the less they earn. We divided 66,465 households into five groups on the basis of the level of turnover in their common stock portfolios. The 20% of investors who traded most actively earned an average net annual return 5.5% lower than that of the least active investors.
Wow. That's hard evidence... hard data. And it's also hard to swallow for many of us.
In his 1991 letter to shareholders, Warren Buffett noted, "Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient."
More than 20 years later, that's still true. Investors need more patience... And patience is exactly what my TradeStops service helps to facilitate. It's only through patience and "doing less" that investors can hope to tip the scales of profitability in their favor by putting the weights on the side of their winners rather than on the side of their losers.
One of my favorite examples of this is a stock that I personally own – Constellation Brands (STZ)...
Our TradeStops system is set up to send a variety of alerts when your stocks hit certain targets – including entry and exit signals. I won't go into the details here. But for the purposes of this example, I'll just say the system last triggered an entry signal for STZ back in July 2012.
Since that time, STZ is up around 714%, and still going strong...
I'm happy to say that I've owned the stock for the entire run... And even though I'm up 714%, I'm still not selling.
Another less dramatic but still compelling example of the benefits of patience is the S&P 500 Index itself.
From its TradeStops entry signal in August 2009 to when the system finally stopped out in 2015, it recorded an 85.5% gain. Take a look...
After that, early last year, our system signaled a new entry point. The index has delivered a solid 30.9% gain since then... And it's still going.
These kinds of results are easily within reach of individual investors. Fewer trades, better results, less risk. Less anxiety. Less time in front of the computer.
There are a lot of stakeholders in the financial markets that love to see us busier than a group of long-tailed cats in a room full of rocking chairs. In particular, I'm referring to brokers, as well as the media. They all make more money when we are more active.
They ply their trade primarily by appealing to our overconfidence – appealing to our egos. Don't fall for it...
Patience leads to profits. Do less. You're likely to make a lot more...