How Patience Will Earn You Money In The Stock Market

 "The casino is open and we must go play now."

That seems to be the attitude that infects all too many investors. When the opening bells ring on the NYSE every morning at 9:30 am EST, traders seem to feel the need to do something.

The ticker tape is running, the talking heads on the media are cheerleading different stocks and sectors. The advertisements are almost constant, urging out to trade more efficiently and smartly, using the new super-duper platform that has all sorts of charts and the information you need to beat the market.

The sad truth all of this is done not to help you trade better, but to pay the bills needed to keep the studio open and keep commission dollars flowing into coffers of brokerage firms. It creates an atmosphere that encourages activity much like the casinos set the stage to keep you gambling.

Behavioral Analysis
Virtually every study ever done on the behavior and results of individual investors has shown us that retail investors badly underperform the stock market over time. The chief culprits for this lack of profits are trading too much and have a propensity to chase the hot stocks and stories of the day.

Year in and year out, roughly 90 percent of them are set to lose money. Only 10 percent turn a profit and far fewer beat the market returns, much less squeeze a living out of all the frenetic in-and-out trading in a short period of time. The brokers do pretty well off all the activity, but the traders themselves do not do nearly as well.

Investors and wannabe traders need to accept a simple fact. If you have a career, a profession, run a business or are otherwise occupied during the day, you are not going to win the trading game. Wannabe traders are trading against people with more information who spend eight to 12 hours a day doing nothing but studying the stock market.

Would you take on LeBron?
Serious traders have a flock of analysts and more than likely are getting technical advice from the people who invented the indicators and patterns novices are trying to master. When trying to beat the market by engaging in short-term trading or switching from hot stock to hot stock, traders are engaging in the financial equivalent of playing LeBron James in a game of one-on-one. You are not going to win, and the statistics and studies have proven that it is a losing game.

It is worse when individual investors decide to jump over and try to trade options. The depth and level of knowledge needed to successfully trade options requires full-time concentration on these markets and in-depth extensive knowledge of math and statistics. The guy on the other side of your trade is not making directional bets on markets and indexes and there is a good chance he is a literal rocket scientist.
The rocket scientist is armed with enough computing power to conquer the world and that option will be priced so as to take advantage of your desire to make a bet. The worst thing that can happen to a retail options trader is to make a few winning bets and start to think they understand how to trade options. That's when you run the biggest chance of losing an enormous amount of money. Most individual options traders are swimming with the sharks while wearing meat suits and just don't know it yet.

The amazing part of all this is that individual investors have a huge advantage and simply choose not to use it. They seem to prefer the excitement of the ringing bells and ticking tape to actually making money in the stock market. Individual investors have no mandate that dictates the type of stocks they must buy or which ones they must avoid.

They do not have to endure the quarterly performance pressure the larger investors face constantly. They can buy much smaller stocks than the institutions and hold them for as long as they like. They have a size and time advantage that is substantial and most choose not to use it.

It seems simplistic to say that buying cheap stocks in a bad market is the most profitable way to invest but it is exactly the truth for investors. If you look at the Forbes list of rich people the ones who made their money directly from investments and not just fees like Warren Buffett and Wilbur Ross made their money in exactly that fashion.

Be a boss like Schloss
Consider an investor like Walter Schloss who never aspired to be the biggest and kept his fund small but constantly just bought all the cheap stocks he could find and held them until they worked. Schloss earned about 20 percent gross for his investors for almost 50 years simply by buying cheap stocks in bad markets and holding them for long periods of time. He took advantage of the size and time advantage and made an enormous amount of money for himself and his investors.

There is a reason private equity is consistently one of the highest performing asset classes. Investors buy businesses when condition in the economy, or a specify sector, are not very good and they can buy a business at a bargain price. Investors hold them for a full business cycle or two and sell them in five years or so at a huge gain when conditions have improved substantially.

Investors could care less about the ticker tape or the candlestick pattern of a portfolio company and focus only on the business value. This is exactly the approach individual investors need to use to make money in the stock market.

Price and patience is the key to stock market profits. Buy businesses at a cheap stock price and hold them until they are no longer cheap. Ignore the bells, patterns and noise coming from Wall Street.

Your broker may not like it, but your accountant will.

Tim Melvin, Contributor

Trader Education