Stop checking stock quotes everyday from this moment on

Do you still remember the very first time you bought a stock? I still do. The feelings that were contained within me at that moment I use my father’s trading account to execute my virgin trade was, inexpressible. It was a barometer of emotions which includes sheer excitement, enthusiasm, happiness and, of course, a sense of anxiety, fearing that your first investment will end up in the red. Under such a plethora of emotions, I can’t stand the urge to check the stock prices and stock news on Yahoo Finance everyday. I sat in front of my desktop everyday before the market opens, and stare at the movement of the stock charts. My heart was thumping at the same rate of how fast the stock price was changing. I believe I am not the only one here. Any investor will have a similar experience when they first start know how to trade.

However, it’s not a good news if you still carry this habit with you after years of stock-investing experience. There’s a high probability that you are earning significantly less money than your peers in the stock market. Statistics and researches have shown that investors that monitor company news and stock price everyday tend to make 53% less profit than investors who check the company news and stock price once a month. This fact may come as a shock to some of you, as monitoring stock quotes and company news frequently doesn’t seem to be the culprit of your poor investment performance. Hence, I think it’s worth it to delve deep into the cause-and-effect relationship between the two matter discussed above.

First and foremost, please keep in mind that it’s virtually impossible for you to eliminate your emotions when you are focusing on the stock price every moment. In fact, ‘negative emotions’ like anxiety, greed, and fear will spread like wildfire the more frequently you check your stock quotes, and to put it in another way using Buffett’s quote:

“Fear and greed is the foe of the faddist”

When fear and greed is acting on us, they will crush our analytical reasoning skill and rationality. This is because we have already drained most of our brain power and mental energy while worrying about how the stock price is doing every now and then, we are too exhausted to evaluate the attractiveness of an investment properly with deliberate thinking. Consequently, we substitute System 2 thinking with System 1 thinking to make decisions with intuition rather than logical reasoning. That often leads to very, very bad decisions and eventually poor investment record.

Secondo, most of us are prone to take more action than we used to if we constantly check on company news and stock prices, which will trigger the do-something bias. Short term fluctuations in the stock prices should be a noise that you are supposed to ignore, but you can’t stand the itch to do something when you keep on absorbing new information on the company’s feed and share price. Therefore, you start reacting to every small portfolio fluctuations and churn your portfolio regularly, even though most often the best decision is just to do nothing. On one hand, frequent portfolio rotations violates the principles of Occam’s Razor, which by its logic states that less decisions = less errors. On the other hand, the meagre trading cost incurred in every trade will add up to a significant expense that can’t be ignored as it erodes our investment return.

Alas! Many investors still have the misconception that constantly updating themselves with the latest company news is a key step to make better investment decisions. It’s sad when the true fact is that doing so will only drag you down into the ‘information overload’ quagmire. Quoting you an example, let us take a look at the ‘latest news’ of Disney corporation.

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It’s not that hard to notice that most of the recent news covered are either analyst opinions (which hardly count as an useful information from the company itself) or unimportant little matter that is irrelevant. Failing to discover how inefficient it is, we would have wasted a large amount of time seeking for low-quality information and reinforces us to think with a short-term lens. Garbage in, garbage out. It’s no wonder that we always make poor decisions when we shape our investment thesis on information and inputs that doesn’t have huge influence over the company’s future position in the long run. Poor investment record turns out to be the perfectly reasonable outcome in this scenario.\

I don’t care how you are going to make it and what way are you going use, just stop checking on company news and stock prices every moment if you ever care about succeeding in investing. I’ve been there and done that, so do many others that I’ve witnessed in my life. It’s insidious, and you may not know why are you failing in the stock market until you came across this short memo. I merely hope my advice and perspective can help you pull yourself out from this dreading habit.

I would like to end this note with an amazing quote which I stumbled upon recently.

“The stock market is a device transferring money from the impatient to the patient”  – Warren E Buffett

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Idea generation in investing

I still remember that moment three years ago, when I was still a novice investor reading Berkshire Hathaway’s annual report with full of excitement and enthusiasm, I was clearly amazed by the spectacular returns of Buffett and Munger over the last 50 years in the stock market. Their early investment in well-known companies nowadays such as GEICO, See’s candy and Coca-Cola are investment classics that should be included in the textbooks in business schools. Nevertheless, what I was wondering at that moment was: How did Buffet manage to unearth those hidden treasure when they are still relatively small and was not in the public limelight? Are good investment ideas that easy to stumble upon? Definitely not. After three years of experience in the stock market and accumulation of knowledge, I finally have some answers for the question I’d asked myself three years ago. My idea generation process often takes place in four forms.

1. Screening

Screening softwares and services are provided by various financial data and software companies such as Bloomberg Terminal, Capital IQ and Factset. For individuals that may not want to spend such a hefty amount on financial softwares, there are also many stock screening tools on the web offered by Morningstar and Yahoo Finance. Most importantly, it’s free! Screens enable us to filter stocks based on different metrics such as a minimum Return on Invested Capital, Debt to Equity Ratio and the free cash flow of the company. Stock screening definitely does a great job in helping us to weed out those stocks that don’t meet our requirements and focus on the instruments that are within the user-defined metrics. However, it is not enough to discover great companies that can last for many years merely by picking stocks based on the results of our screening process. We must have the ability to see the big picture from the numbers that are screened. For example, a higher than average debt-to-equity ratio doesn’t implies that the company is a rotten apple. It may indicates that the company needs massive capital to fund its growth and expand market share. It might have a bright future ahead of it, making it the next Google or Amazon. Likewise, a low debt-to-equity ratio doesn’t make a company a ‘quality-guaranteed’ company. On the other hand, investors should have additional filters to really get down to something interesting from a long list of companies that appear on the screen. The filter includes qualities and traits that should exist in a well-managed company such as candid management, healthy cash flow and a healthy amount of debt. There are too many qualities in a company that should be taken into consideration so I will not list them out one by one here. (That would probably cost my entire school holiday!). In short, stock screening is a very useful tool to generate ideas in a short time span but it must be used judiciously, coupled with your own analysis and filters.

2. Other investors

You can get some fantastic ideas from other investors occasionally, ranging from institutional investors such as David Einhorn and David Tepper in investment conferences, to people around you which share the same passion towards investing with you. For me, my friends and pals are still concentrating in their video games and social network. Hence, my only source of investment ideas from people are my father and professional investors that share their ideas. I feel the need and commitment here to make a point that getting ideas from your friends and other people doesn’t mean that you should buy in their idea and just follow their decision without doing any due diligence and thinking. This will only make you invest like a headless chicken and end up in red. What you should do is trying to understand the underlying reason of their decisions, their investment analysis process and think of disconfirming evidence to challenge their view. If after you did your research and analysis to come to a conclusion that the particular company is an attractive one, then congratulations! you earned yourself a great company from other people. However, if you think that the company is overvalued and thus not worth investing, at least you get to improve your thought process and obtain a different perspective from the others. This is a heads-I-win, tail-I-win situation!

3. Look and Observe

I began reading about Peter Lynch and his investment concepts before I really began studying Buffett. His common sense approach stroke me hard and I still think that it is a really great approach to find out interesting ideas that are not known by anyone. Looking and observing at the things that is happening around the world is one of the best investment I could’ve ever made. You will soon start to realise that many of the things around us pretty much contributes to an investment idea. I never like to go the market with my mother because I’ll need to wake up really early. One morning my mother dragged me out of bed and without any other choice, I would need to follow her to the morning market. While my mother was buying eggs, she was complaining about the sky-rocketing egg price recently. Two months later, the largest egg company in Malaysia, Teo Seng announced its earnings, with profit exceeding the consensus by a large margin. Since then, I was always prepared to wake up early and follow my mother to the market. Quoting another example from the book One Up on Wall Street, Peter Lynch has always bought his children Disney films and toys and his children were never tired of watching them over and over again. The rest is history. He still regretted missing this huge opportunity until today. However, the quote ‘Invest in What You Know’ made popular by Peter Lynch is being misunderstood by the public. Some 25 years after his retirement from running Magellan Fund, Mr. Lynch clarifies that he never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock,’ ”. 

Every investor should keep in mind that however good is the product of the company or however confident your friend seems when he recommend an idea to you, you should conduct enough due diligence and analysis before making your investment in a company. Never let the herd guide your thinking and don’t let their mind make decisions for you. As Mr.Buffet would have put it,

“Don’t think of buying stocks, think of buying businesses”