Why Treating Your Investment Portfolio as Entertainment is a Costly Mistake

Trading in and out of positions is one of the best ways to lose out on capital appreciation and find yourself accumulating losses. Too many people confuse the stock market as some sort of get-rich-quick scheme, therefore treating it as an active source of entertainment. We have sports for that.

Building wealth through the stock market is a slow burn, and it is intentionally boring for those us building long-term financial security —rightly so.

Types of investors that play the long game (benefits of buy and hold investing)

If you’re a value investor, there will be times when no activity has touched your account for years on end while you wait for good discounts according to your calculations.

If you’re a systematic investor like me, the only activity that your account will see is shares being purchased. Both the investor types mentioned here also fall into the buy-and-hold category, meaning selling isn’t the objective. Rather, it’s about getting their hands on as many shares of a business as possible and allowing their dividends and capital to appreciate long-term.

Buying in and selling out of positions just for the sake of entertainment is a fool’s game. It is more for the ego than for the nourishment of the soul. The best investors learned this either through firsthand experience or by learning from those who made the mistake of doing such a thing.

Great investors understand the importance of holding onto quality businesses (stocks)

It is still hard for me at times to see someone talk about selling their inherited shares of Coca-Cola for a better speculative opportunity or to trade in the market. If I had the capital to buy the shares from them, I would because it is those of us who are playing the long game who end up winning at the expense of those who are playing the short game.

Understand that to sell, there has to be a buyer on the other end. Those buyers are greedily waiting to hold a bigger slice of the pie for whatever quality productive asset you tend to sell. To them, it’s plain silly that someone would sell their shares of Coca-Cola at a discount. They will happily buy the shares and keep them forever for their own household and private accounts, so there are fewer shares on the market to their benefit.

This only matters if what you are holding is of intrinsic value, meaning what you hold is producing profits. For investors who buy and hold, the entertainment is in watching ourselves get richer each year through dividends and earnings per share, which for us is the return on our investment.

Companies buy back their stock (stock buybacks)

Companies are also on the other end buying back their shares to reduce the number of shares on the market, which benefits the company itself and the investors smart enough to buy and hold. This is known as stock buybacks. When the media reports that “Disney is putting cash aside for stock buybacks,” this is what they are talking about.

Insider selling is often looked at as a sore spot because it often means the company isn’t doing well or that management is abusing the company itself and crashing it to the ground. Insider buying, on the other hand, is looked at as a positive sign because it means management believes in the direction the company is going and cares enough to have their own capital invested in the company they are in control of.

When some investors sell

Overall, you can see that selling and trading are often frowned upon by both value and systematic buy-and-hold investors who value their holdings for the long term. This doesn’t mean we never sell; it’s just that when we do, it’s for a good reason—either to skim some cream off the top after holding for a long period with capital appreciation, to find a better opportunity to generate returns, or when the stock price has shot up to ridiculous highs, and we would be foolish not to reap some of the profits—think companies like Nvidia.

Those who are into speculative assets and were smart did this with Bitcoin and became rich. But they were also early adopters and got in before the media hype. The same happened with GameStop; those who were aware of the situation before the media frenzy, if smart, sold some once the stock price reached ridiculous highs.

Value investors often have a certain price in mind and sell once it is believed that the stock has reached fair value. I personally like to hold onto companies and don’t have a price in mind to sell at. Instead, I like reinvesting the dividends long enough for them to generate their own portion of shares, then watch the position grow year after year.

I have no plans to sell out of any of the positions held on the balance sheet for the household accounts and private fund. There will be a time when selling some shares for profit will cross my mind, but not anytime soon. Until then, I find accumulating as many shares of great companies to be the bread and butter.