Block 28: What to Do Daily vs. What Not to Do Daily
It is important to learn what to do as an investor on a daily basis because it might help with the practicality of it all.
Good Idea: Learn more about your companies.
Bad Idea: Look only at the stock prices of your companies.
Looking only at the price of your stocks as they fluctuate up and down is not good investing. Warren Buffett’s mentor, Benjamin Graham, said, “in the short term, the market is a voting machine, but in the long term, it is a weighing machine.” What that means is that the daily price movements of your stocks are influenced by how investors feel about a company at that given time. However, in the long run, the price of stocks will be weighed by business results. So this is an incredibly important lesson: only focus on business results.
Sometimes the market goes down, in fact it will go down. Your job is to focus on the business results of your investments. If there seems to be nothing wrong, the market might be offering you stocks at discounted prices.
To take the other side of the argument, if one of your stocks is down a whole bunch, it would serve you well to find out why. This is one of the only reasons why it can be good to check the price of your stocks. Because sometimes the market can be right. If you blindly buy into a stock because it is down from your cost basis, you might be doing yourself some harm. The principle still remains; focus on the business results rather than the stock price.
Good idea: Check your brokerage once a day
Bad idea: Watch your brokerage all day
Same idea here. Investing is about businesses, not stock prices. Your stocks aren’t going to go up more because you spend more time watching their prices oscillate up and down tenths of a percent. The stock market, PST time, is open 6:30 am – 1 pm. Don’t spend that whole time watching your stocks. We know it can be fun. But it will hurt your returns.
Again, on the flip side, it can be good to at least check your stocks because sometimes the stock price can implicitly tell you something. If one of your companies reports terrible earnings and your stock is falling off a cliff, read the transcript! If you think the reaction is overblown, maybe you buy more. But don’t just make a decision based on the stock price. That is dangerous. Sometimes you might get lucky, but it is unsustainable.
This is very common with investors though. For instance, let’s say you own a company who reports really bad earnings; revenues are declining, margins shrinking, and it is burning cash. So naturally the stock plummets 20%. Should you buy more? Let’s say prior to the earnings call, the stock price was $100. If you liked it at $100, shouldn’t you love it at $80? A 20% discount, right? Well, here’s the thing; you have to look at the situation in context.
What we mean is that you have to determine if the facts have changed. In other words, is this earnings miss just a short term blip for a healthy company or is it the start of a deteriorating business? If you think the business is deteriorating, the facts have changed. If you liked it at $100 with the information you had then, you now have different information; you should change your mind. This is looking at the situation in context.
With that said, quarterly results can sometimes be taken with a grain of salt. If you are truly a long term investor, one 3 month period for a company likely won’t tell you much. We advise that you keep track of the numbers to give you context, but it probably isn’t a good idea to make decisions based on one quarterly report.
So those were two lessons about how to best spend your time daily as an investor. The more time you spend reading 10Ks, financial statements, industry reports, and other company news, the better. You will react more rationally and be more confident in your decisions. It will also be more difficult. Who doesn’t love staring at stock prices? But the market, as we established, can be very emotional. Evidence and research is the antidote to that emotionalism. Remember: focus on business results, not stock prices. Now that we’ve sufficiently hammered that home, we will move on to *sniffle*, the last topic…