Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Don’t do something, just stand there!

Mark LaMonica, CFA  |  26 Aug 2020Text size  Decrease  Increase  |  
Email to Friend

Warren Buffett has said that his favourite holding period is forever. He understands that investors often overemphasise the importance of recent events, rushing into hot stocks when they’re overpriced and fleeing from market downturns. Investors can fight this common error by focusing on long-term lessons and long-term performance.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Distinguishing between what you buy and where you buy it is crucial. Since buying a share makes you a partial owner of a company, the stock market is simply a means to purchase and sell shares. It is a marketplace that connects buyers and sellers. A key benefit of stock investing is liquidity. An asset is considered liquid if you can buy and sell it quickly without any meaningful drop in its price. This is attractive for investors because they can quickly convert a share into cash. To facilitate this, it is necessary to have constant price discovery. In other words, both buyers and sellers need to know the price of shares in order to make both sides comfortable enough to transact. That is the role of the stock market and market participants.

Liquidity is crucial when it comes to distinguishing between investing in a company that trades on the stock market and buying an investment property, or a small business. Imagine a world where you constantly knew exactly what someone would pay for your house and you had the ability to sell it to them in minutes for an insignificant commission. It would not be long before this constant flow of information would start to change your behaviour. The ability to check the price doesn’t mean you would always do it. But you would probably check when there were large price swings, possibly caused in part by your friends, family and the media weighing in. The constant price discovery and the ease of transacting would amplify the fear and greed of market participants. And fear and greed cause people to act when it is generally in their best interest to do nothing. Constantly buying and selling investment properties or small businesses would be a mistake. Yet many people think “playing” the market through continual trading is an effective approach for building long-term wealth.

The fact that you can do something doesn’t mean it is a good idea. Maybe you are a savvy trader who can enter and exit positions at just the right time. Chances are you are not. At Morningstar we advocate a long-term investing approach. Taking a patient, long-term view helps us ride out the market’s ups and downs and seize on the opportunities when they arise. We know that investors often overemphasise the importance of recent events, rushing into hot stocks when they’re overpriced and fleeing from market downturns. We fight this common error by focusing on long-term lessons and long-term performance.

Being a Morningstar Investor means investing for the long-term. Learn what else we believe by reading the Morningstar Guide to Investing.

is a product manager, individual investor, Australia.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend