The 1 Thing You Should Never Do In the Stock Market

Credit: Neil

Professional money managers have millions, sometimes even billions, of dollars at their disposal and it’s easy to think that with the resources they have, making quick trades profitably shouldn’t be a problem at all.

But is that really true?

Short-term pains

In a research paper titled Short-term Institutional Trades published in March 2015, finance professors Bidisha Chakrabarty, Pamela C. Moulton, and Charles Trzcinka – from the Saint Louis University, Cornell University, and Indiana University respectively – combed through 105 million round-trip trades that were made by a total of 1,186 money managers and pension funds between 1999 and 2009.

They found that some 96% of these institutional investors had bought and sold a share within a month and surprisingly, that the “average returns on short-duration trades are negative [emphasis mine].” In fact, the professors also discovered that “the shorter the duration the more negative the returns.”

So, it seems that despite the resources they have, big institutional investors also find it tremendously hard to outguess the market’s short-term swings.

With the above in mind, it wouldn’t be unreasonable to call short-term trading the one thing that individual investors like you and me should never do in the stock market.

Long-term gains

Thing is, there are real advantages that come with long-term investing. My colleague Morgan Housel explains:

“Holding stocks [in the U.S.] for less than a year amounts to little more than flipping a coin. You are almost as likely to lose as you are to win.

But the odds of success grow perfectly with time. If you hold for five, 10, 15 years or more, the odds of earning a positive return on stocks after inflation quickly approach 100%, historically.”

The chart below, by Morgan, puts his words into pictorial terms:

Long-term returns for the US stock market

There are also similar market dynamics here in Singapore. If we were to measure the Straits Times Index’s (SGX: ^STI) returns at the start of every month from January 1988 to August 2013, here’s what has happened for different holding periods:

  • For a one year holding period, an investor in the index would have made a loss 41% of the time.
  • For a 10 year holding period, losses would have occurred only 19% of the time.
  • Stretch the holding period to 20 years, and there had historically been no losses.

The secret to investing

I’ve come across my fair share of market participants who think that successful “investing” involves the ability of one to nimbly jump in and out of the stock market in order to catch every uptick and avoid every small decline.

But, that couldn’t be further from how things really work. Patiently holding shares in well-run companies for the long-term can do wonders too. The experience of shares like Straco Corporation Ltd  (SGX: S85), Raffles Medical Group Ltd (SGX: R01), Super Group Ltd (SGX: S10) and Dairy Farm International Holdings Ltd  (SGX: D01) are just a few of the many examples of how lucrative it can be to invest for the long-term in a growing company.

Table for long term winners

Source: S&P Capital IQ

Investing legend Peter Lynch once said this about investing in the stock market:

“I’m trying to convince people there is a method. There are reasons for stocks to go up. This is very magic: it’s a very magic number, easy to remember. Coca-cola is earning 30 times per share what they did 32 years ago; the stock has gone up 30 fold. Bethlehem Steel is earning less than they did 30 years ago – the stock is half its price 30 years ago. Stocks are not lottery tickets. There’s a company behind every stock – if the company does well, the stock does well. It’s not that complicated.”

Forget about trying to quickly trade in and out of your shares (this is just a reminder, but even the institutional investors can’t do it!). Instead, focus on studying the business behind each share and find the ones which you think stand the best chance of being to grow materially over the long-term. It really is that simple when it comes to successful investing.

For more investing analyses and important updates about the stock market, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Straco Corporation, Raffles Medical, and Super Group.