What most call ‘news’ is really just ‘noise’ to investors.
The majority of what’s in the Wall Street Journal, the Financial Times, the Telegraph, the BBC and TV news channels is really just ‘noise’. People pay way too much attention to this ‘noise’. They buy and sell stocks based upon this. And this is a big mistake.
Instead of building a solid portfolio which encapsulates great businesses that compound for decades, people wind up selling at the slightest sign of trouble, based on the ‘noise of the news’. And very often, they lose money because of this.
In order to get big returns when investing, you need to take the long term approach and not the short-term view based on news.The average investor does not generally make several times their money in just a couple of years – It takes patience.
Let me explain what I mean:
To be successful in the long-term you need to stay as far away from playing “global events trader” as you can. It’s difficult for even veteran traders to “play” global political and economic events with expertly timed stock ideas. Ignore anyone who suggests otherwise.
To truly understand why basing investing decisions on current news is bad, you need to understand the coffee can portfolio. With the coffee can portfolio, you find the best stocks you can and let them sit for 10 years. Ideally, you want to buy a group of 10-15 stocks. With the coffee-can approach, you incur practically no costs with such a portfolio. And it is certainly easy to manage. You also have the advantage of not having to constantly check share prices, buying and selling stocks to quickly, worrying about the economy and worrying about ‘noise’.
Buying stocks as per the coffee-can method should sit out of the way, under the mattress, untouched for years, ideally for decades. It should’t read the news. It doesn’t have any political viewpoints to share. It couldn’t care less what’s going on in the world. There is essentially no noise in a coffee can.
All that matters for a coffee can portfolio is that you fill it with good solid businesses that have long-term growth potential, regardless of “noise.”
Let’s take the example of Greece, which has been all the talk recently. The stock market was down for several weeks on news that Greece was in deep trouble and no bailout was coming. But now, the market is up on news that everything’s all well and good.
Though the current situation is tragic for the people of Greece, it should have no influence on your investing decisions. You see, Greece only accounts for less than 1.5% of European Union GDP. That is a tiny number. You shouldn’t lose sleep worrying about 1.5% of the economy behind the euro. It’s unlikely that economy was ever healthy enough to back a major currency to begin with, which I bet every decent currency trader has always known. So if you’re getting worried about it today, you’re late to the party.
Based on this, you need to conclude that a Greek exit from the euro would have no long-term effect on a well selected group of companies in a coffee-can portfolio.
When it comes to your portfolio and your investment decisions, let Greek noise fill Greek ears, not yours.
You need to stop listening to the noise and start building a portfolio of great stocks that you will hold for the long term – possibly forever.
Triumph of the Optimists: 101 Years of Global Investment Returns, written by Elroy Dimson, Paul Marsh, and Mike Staunton found that U.S. stocks appreciated 1.5 million percent in the 20th century. Colossal Wars, influenza outbreaks, the Great Depression, inflation… you name it, it happened in the 20th century. And still, U.S. stocks were up 1.5 million percent. Now tell me, is it not worth taking the long term view and cancelling the noise of the news?
You need have an average holding period of 10, 15, or more years to make multibagger, coffee-can-style returns. You shouldn’t worry about ‘noise’. Instead, develop a bias for long-term holding of well-run businesses with great upside potential.