**originally published in Making of a Millionaire**
There are really only two fundamental rules to success in the stock market:
The biggest thing you can do to ensure your success is to buy something you understand, believe in, and can afford, and then leave it alone for the next 5–10 years (if not longer).
The hardest thing to do when it comes to the stock market is to stick with Rule #1.
Don’t believe me? Let me share with you a personal story:
One of the first single stocks I ever bought was Tesla. I bought it because I believed in the ideas that Elon Musk was touting, and I thought Tesla would be a truly revolutionary company. So far, so good, as far as the fundamentals go. I bought two shares on Aug 7, 2014. At the time, each share was worth $252.39. I held the shares for 5 years and sold in May 2019 for $232.69, thinking it was better to cut my losses and put the money into something more useful.
I wondered if I had misjudged Tesla or Musk himself. More and more news stories kept coming out about missed production deadlines, other companies taking market share away, and Musk’s own inability to stop self-sabotaging with bolder and bolder predictions and decisions relating to his company. In 2019, Tesla was starting to look less like a revolutionary company and more like a billionaire’s pet project gone full dumpster fire.
At the time of this writing, those two shares, thanks to the 5-for-1 split that occurred in August 2020, would be 10 shares, and those 10 shares would be worth a total value of $11,863 if I had just held on for another three years.
I’d be almost twelve thousand dollars richer right now if I’d just done nothing.
Why is this rule so hard to stick to? Why do we feel that we have to constantly be making tweaks and changes to our portfolios? Why do we spend hours poring over stats and reports and earnings calls? I believe there are two main reasons, one that is easy to fix and one that is much harder to overcome. Let’s deal with the easy one first.
The easy-to-fix reason why we have such a hard time sitting back and doing nothing when it comes to the stock market is because of the constant stream of other people’s advice, wisdom, and “next sure things” that is being put before us every day. The old adage says, “in a gold rush, be the man selling shovels,” and there are more shovel salesmen in the investing space than there are actual investors these days. Everyone wants to tell you about the stock they are 100% confident is going to go to the moon. Everyone wants to sell you their course on investing. Everyone has an e-book for you to (buy and) read.
This phenomenon is everywhere, all the time, but fortunately, it’s also fairly easy to tune out. Spending less time on the internet, reading “investment advice” from people we don’t know is pretty easy to accomplish. There’s a lot more interesting stuff on the internet to read and learn than whatever the latest shovel-seller is shouting in your face about on his Clickfunnels page.
The second reason we have such a hard time playing the long game with our investments is much more difficult to overcome, but not impossible. The second reason is this: All human beings are, to some degree, gamblers by nature.
Think about it; there are only a handful of lifeforms on this planet that have the mental capacity to consider a range of options, and then choose to act against their own self-interest, either in pursuit of the wellbeing of others (which we call kindness, thoughtfulness, and self-sacrifice) or in pursuit of a greater benefit later on (the principle of delayed gratification). From that jumping-off point, it’s not much of a leap to get to the gambler’s mentality that is always looking for the next big thing, the next sure winner, the next jackpot. And too many of us treat the stock market like a slot machine anyway. We feed our money in, pull the lever, and hope for Lady Luck to spit out triple-7s.
Now, I realize that not all of us approach the stock market in quite so cavalier a fashion, but even smaller, less grandiose things can eat into our wealth over time. One of the easiest examples to demonstrate this is portfolio rebalancing. It’s something many advisors and experts recommend to be done annually or perhaps even less frequently. But why? Why would you move money from investments that have outperformed and slide that money into your most sluggish, underperforming stocks? Is that not the literal meaning of the phrase “throwing good money after bad”?
What about buying investments that we don’t truly understand because we keep hearing about them? And I don’t mean from the “gurus” and other shady characters trying to get your money that I mentioned above. I mean from non-financial news sources, from the national media, from the Wall Street Journal, for crying out loud! The rise of non-traditional investment vehicles is fueling a whole new generation of investors who don’t understand what they’re buying or why it’s worth what it’s worth, from cryptocurrencies to NFTs, to investing in Scotch and artworks. It’s easier than ever to put your money into something that promises epic returns, which makes it harder than ever to quiet that inner voice that says, “maybe I should try this out…?”
So how do we quiet the inner gambler? The best way I’ve found to do this is by studying the handful of truly successful investors throughout recent history. People who have made and kept their wealth by doing the unglamorous work of study, research, and then buying and holding…and holding…and holding.
The harsh reality of investing is that sometimes, the simplest thing to do (buy and hold) is the hardest thing to do. It goes against our very nature as human beings. It requires patience, dedication, and self-confidence. It requires substantial work up front to find and buy the best options you can, and then it requires you to exercise restraint and determination NOT to mess with your money!
I wonder how many people out there have similar stories to mine? How many of us would be many times wealthier than we are right now if we had followed these two principles: Buy what you understand and believe in, and then do nothing for as long as you possibly can.
Photo by Michael Longmire on Unsplash