Why Do Only a Few Investors Succeed?

Investing – in stocks, mutual funds, ETF’s, etc. – is much like anything else.  Out of the many who try it, only a few end up really doing well with it.  But why?  Shouldn’t anybody who bought Apple or Amazon or Starbucks or MasterCard or PayPal or [insert name of ginormous, highly successful company] stock back in the day (or even the past five years) have done well with it?

The funny thing with stock investing in particular is that those who experience the greatest success are defined not by what they do, but more by one certain thing that they DO NOT do.  Let me attempt to frame this in a riddle:

What one thing must you DO that is the one thing you must NOT do in order to become a successful investor?

To add to your confusion, the one thing you must not do takes a lot of patience and discipline, which therefore means you’re doing something in order to make sure you aren’t doing this one thing that will ensure success.

Most people think that you have to “do” a bunch of things in order to become a successful stock investor.  Let me address and then dispel some of those myths, then address the one absolute “NOT do”:

You need to pick “good” stocks

I have a newsflash for you:  most of the stock investing services that recommend stocks for people to buy tend to all recommend the same “hot” stocks.  About three years back, the most reputable services were all telling everyone to buy Shopify (and many still are).  Now, they’re telling people to get into companies like The Trade Desk and Twilio and MongoDB.  Yes, for investing success it is essential to buy shares in well-run companies, but why do some investors end up earning over 10-times returns on stocks like these while other people earn only a few percent or even lose money?  Did they not all buy the same “good” stocks?  I’ll answer this later on when I address the riddle.

You need to buy “good” stocks at the perfect time

Every one of my most successful stock picks (what I consider to be greater than a 100% return, or a doubling) went through a period, some more than once, where the price fell below what I bought the stock for.  In some cases, that loss was over 30 percent!  Yet I eventually achieved 100+ percent returns in those exact same stocks.

Was there a “perfect” time to buy each of those stocks?  Some might argue that the perfect time would have been the lows after I bought them.  However, the perfect time would have been at their all-time lows which is absolutely impossible for anyone to predict – even Warren Buffett.  So there’s never a “perfect” time to buy any stock, whether or not it eventually doubles in value. There’s only a “right” time and that time is that moment when you’ve saved up enough money to buy a stock regardless of its current price!

So, how do you end up with over 100-percent returns on stocks that might appear to be losers initially?  I’ll answer this also later on when I address the riddle.

You need to “time the market”

Ignorant investors will take offense to the last section, about the notion of there being no “perfect” time to buy a stock.  So they resort to constant trading, constant buying and selling, in order to find that “perfect” price at which to buy a stock.  The problem is, they’re never satisfied as the price almost always, if even only temporarily, dips below what they bought it at.  Meanwhile, any profits they do make in the act of being an active trader are reduced, sometimes greatly, by trading fees.  Even if fees are low, the active trader often sells after only a small return, which I consider to be anything less than 100 percent, and so any sizable gains can take a lot longer to achieve than by simply buying and holding stock in great companies for a period of several years.

When you begin to study the habits of the most successful investors in history – Warren Buffett, the Gardner brothers (David and Tom, founders of The Motley Fool), Peter Lynch, etc. – you’ll find that they don’t obsess over every blip and dip on stock charts.  They’re investing in companies, not ‘stocks,’ per se; in other words, not grabbing the lever and blindly pulling and hoping for whatever stock shows up to gush out cash like a slot machine.

Although I just mentioned a “NOT do” of successful investors, I didn’t mention the one essential one … until now.

So, what’s the answer to the riddle above?  It’s simple:  the one thing the successful investor does NOT do is sell stocks.

Ever?  Well, no.  They might sell once they’ve reached a certain goal.  Their house might need renos or repairs.  They might want to body-slam their amount of mortgage debt.  They might have a son or daughter going off to college or getting married.  They might need the money for their old age.

They just aren’t in the habit of selling.  So long as a company that they’ve bought stock in is going in a generally upward trajectory (there are always dips along the way), they hold on unless they have an urgent need to sell.

Will they sell if a company’s stock price ‘goes south?’  Only if they’ve determined that a setback is the result of a fundamental flaw in their investing thesis that they either overlooked or that appeared after they bought in.  If the price takes a dip due to reasons not related to the integrity of the company – if the market is having “jitters” due to socio-economic factors, for example – then they’ll hold on and wait for the price to rebound.  The smartest investors will also add to their favorite stocks at this time.

They also don’t panic-sell.  Let’s face it, the odds of a stock’s price going up in the moments and days and weeks after you buy it is precisely 50 percent.  The odds of that price going down makes up the other 50 percent.  Why should you sell just because it goes down?  Didn’t you consider the odds in the first place?  Why are you investing or even considering it if you didn’t think about this beforehand?  If you’re going to get nervous or even upset about a drop in price, then maybe you’re just not ready to be a stock investor.

In any case, you’re certainly not ready to be a successful one, because the successful stock investor rides out the bumps.  He might get a bit frustrated that he didn’t see a setback coming, but he also didn’t just pick any ol’ company to invest in.  He searched and likely paid for recommendations (ex. The Motley Fool).  He learned about the company AND its position in its industry:  leader or follower?  He looked at its revenue and earnings and profitability and cash flow.  Therefore, his trust in that company’s ability to rebound and hopefully provide a terrific return down the road had been built upon knowledge and research in that company, not just randomly picking something to invest in.

As I mentioned just after the riddle, this act of NOT doing, of not being in the habit of selling stocks, involves DOING in the form of a lot of patience and discipline.

In my personal experience, resisting the temptation to sell a “good” stock when things get rocky is one of the hardest things to do as a stock investor.  I’ve fallen for it only a few times and regretted it every time when I’ve seen the price rebound and then go far beyond the price I originally sold at.

Fortunately, in almost all cases, I’ve held on to the companies I’ve had confidence in and have reaped very handsome returns.  If I had panic-sold every one of those, my portfolio value would be a mere fraction of what it is today, perhaps even negative!

I hope that I’ve encouraged you to keep holding onto a stock unless something drastic changes at the company level.  “Buying and holding” is basically the popular term for not being in the habit of selling that I’ve described.  It is truly one of the greatest ways to generate wealth through investing of any kind, again provided the investment keeps doing well over the long term.  Selling is only recommended for emergencies, the life situations mentioned above, to get out of a stock whose thesis has changed and whose value is nearing a 15- to 20-percent loss, or if you’re confident that you can find a stock that will perform better than one you currently hold if you aren’t satisfied with the average annual return.

If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing?  It could become one of the most beneficial 30-minute reads of your life.

One last thing:  be sure to click the Follow button near the top of this page on desktop or after this post on mobile.  (I don’t post regularly because I believe in quality over quantity, so keep an eye on your Inbox.)

To new beginnings!

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