John Kay is an economist who writes interesting thought-pieces for the Financial Times. Here is some selected text from an article published earlier this month, in which Kay discusses how watching share prices can be unhealthy.
Last week I bought shares in Royal Bank of Scotland ahead of the company’s results. These were ahead of market expectations and the stock, purchased at £20.40, ended the week at £20.75. You would expect me to be pleased, and I was – until I noticed that in last week’s volatile markets, the price between times had dipped below £20.
But regret for not buying RBS shares at £20 serves no useful purpose. The opportunity to buy at that price on Wednesday afternoon has passed. Even if the chance comes again, which it probably will, a purchase will then have to be justified on its own merits.Nassim
Nicholas Taleb, the trader and author, illustrates the curse of knowledge with the example of the investor – call him Warren Buffett – who substantially outperforms the market over the long term. If Warren looks at his portfolio only every five years, the results will almost always be encouraging. If he reviews his investments annually, he will have observed more good years than bad ones. But even a successful investor who looks at his portfolio every day can easily become depressed. Fifty one per cent good days and 49 per cent bad days will produce a good result, just as someone whose coin tosses work out 51 per cent of the time will become extremely rich. But it may not feel like that.
For those who follow events too closely, the pain of regret can far outweigh the joys of success. Life, and markets, contain so many missed opportunities. Monitoring your portfolio every day will impose a high emotional cost for negligible financial benefit.“
Many investors will have concluded that the current turmoil makes it vital to be close to the market. The opposite conclusion is true.” – noise is relative, what is noise? depends on your time horizon.
The message is clear: try to cultivate the broader outlook and don’t obsess with every fluctuation. For short-term, higher frequency traders, the message is that we shouldn’t pay too much attention to the daily swings in our equity. Indeed, in theory, if we are satisfied that we have an edge and if this is supported by our trading record, then we shouldn’t feel overly elated on a day of strong profit, because we know losses are just around the corner, and vice-versa. Imagine a company publishing it’s accounts every day. It distracts from the bigger picture.
I’ll confess that I am a long way off being emotionally neutral when faced with short-term losses and profits, but it is something I am working towards.