Transforming Your Basic Advantage into a Basic Disadvantage

The stock market was closed yesterday in observance of the President’s Day holiday. Markets are also closed every year on New Year’s Day, Martin Luther King Day, George Washington’s birthday, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas.

Beyond holidays the stock market has a history of extended shutdowns for various reasons including natural disasters, terrorist attacks, and power outages. The longest ever such streak was in 1914 when the stock market was closed for around four months because the start of World War I basically dried up all liquidity on the NYSE.

But for the most part, markets are open around 252 trading days a year. These days any time you want you can pull up the value of your portfolio on a near-instantaneous basis to check the current prices of your portfolio, funds or individual securities. While this may seem like a huge improvement from the days when investors would have to wait to check the next day’s newspaper to see the new price of their shares, there are some downsides to this ability to have up-to-the-minute prices on every market price imaginable.

The longer I’m involved with the markets the less I find myself paying attention to the daily, weekly or monthly gyrations. You begin to realize that things you once fretted over many years ago were just wasted energy. I actually don’t mind when the markets are closed for a long weekend. It’s one less distraction.

Benjamin Graham discussed how investors would be better off if their stocks had no price quotations at all in his classic, The Intelligent Investor:

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

Some investors are able to watch every tick in the markets with complete indifference but it seems most investors see more harm than good by trying to swim through the sea of noise in the short-term movements in the market.

The reason this can be so problematic for investors is that we humans suffer from what Richard Thaler calls myopic loss aversion. Myopia or nearsightedness can be harmful because the more often we check the value of our portfolios or holdings, the more likely we are to see losses (stocks are basically a coin flip between being positive or negative on any given day). The more likely we are to see losses, the more likely we are to experience loss aversion, which is the human tendency that makes us regret losses twice as much as gains make us feel good.

Thus, the more often you look at your portfolio, the more often you’re likely to feel terrible from seeing short-term losses in value. The less frequently you evaluate your portfolio the more likely you are to see gains in your account because the probability for gain increases with a longer holding period.

Paying close attention to the markets on a tick-by-tick basis can also give people an illusion of control. You begin to assume that because you’re keeping up with everything that’s going on that you have more control over the outcomes. The opposite is true more often than not and the harder you try the more mistakes you make in the markets. Admitting you have no control is the first step to gaining more control over your sanity when dealing with the markets.

Here are a few questions I’m pondering about market holidays and what it would mean if we had more of them:

  • Price tends to lead sentiment in the markets, so what if there were fewer price points?
  • How has the instantaneous access to daily prices changed the way investors interact with the markets?
  • If the market closed for a couple months and you didn’t get to see the prices or value changes in your portfolio, would it really matter?
  • Does knowing the price of your portfolio or holdings on a minute by minute basis actually help?
  • How often does the knowledge of performance on a single day, month or year really impact most investors who often have multi-decade time horizons?

As Graham alluded to, the biggest advantage you have as an investor is the ability to think and act for the long-term. That may be more important today than ever because our society and the finance industry have become more and more obsessed with the short-term.

Source:
The Intelligent Investor

 

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