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How to Overcome This Big Problem in Investing

American engineer and entrepreneur Nolan Bushnell once described a good game as “Easy to learn but hard to master.” I think it’s an apt description for the stock market as well.

Investing is a tough game to master because of the multitude of mistakes that can be made. Studies in behavioral finance have shown that investors’ investment decisions are highly driven by their emotions as opposed to logical or rational thinking.

This is especially true during episodes when emotions are heightened, such as a raging bear market when stocks are getting hammered (fear will be the most palpable emotion), or a rampaging bull market (greed will rule here) when stocks appear to go in only one direction – up.

When emotions are brought into the picture, the urge to trade frequently grows and mistakes ensue. One way to counter this is to think long-term. As billionaire investor Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.”

My colleague Chong Ser Jing had illustrated this once with the following chart:

Straits Times Index's odds of making losses from May 1992 to January 2016
Source: S&P Global Market Intelligence

It plots the Straits Times Index’s (SGX: ^STI) historical odds of making a loss for various holding periods, ranging from one day to 20 years. Here’s Ser Jing explaining the chart:

“A holding period of one day means it’s a coin-flip for you when it comes to making a gain. But when your holding period is measured in years, your odds of success goes up – and at the 10-year mark, dramatically. When we look back in time, the Straits Times Index has never delivered a loss for an investor with a 20-year holding period.”

If you ever find yourself wanting to trade frequently, fight the urge and think long-term. Or think back to Ser Jing’s chart just above. Time is one of the best friends an investor can have.

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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 contributor James Yeo doesn’t own shares in any companies mentioned.