The Biggest Decision for the Individual Investor
The most important decision for individual investors is what to do for themselves. Various studies show that individuals, on average, attain about half of the overall market return when trading their own accounts. The main reason is that they make poor timing decisions. They overestimate their own capabilities and underestimate the difficulty.
It Seems So Easy
Technical analysis is deceptively easy. In an outstanding article, Pradeep Bonde writes as follows:
Chart reading is a long enduring cult in the market. Beginner traders
are quickly grabbed by the simplicity of charts reading techniques and
chart patterns. They waste countless hours and years perfecting chart
reading and making sub optimal returns. Many get so lost in the technical analysis jungle, that they never find profitable way out of it.
Read the entire article and follow the links for a full understanding of the message.
Advertising by major brokerages encourage the individual investor to believe in market "feel" and to have confidence in making decisions on this basis. We have written about how this leads to mistakes during scary times and distracts people from the key fundamentals.
It is in the interest of online brokers to encourage individual trading. Beware of messages that make it seem too easy.
What is Required
Good investing requires intelligence, knowledge, method, discipline, and psychology. In various articles, we have covered each of these topics.
Even this formidable collection of attributes is not enough if the investor is unwilling to make a significant commitment of time. David Merkel, in his excellent series (check out the other parts also) for the individual investor, writes wisely as follows:
People come and ask me for investment/financial advice. My first question is:
How much are you willing to learn, and how much work do you want to do?
Jim Cramer frequently advises investors that they must expect to spend one hour per week per stock in their portfolio.
We wonder how many investors are really willing to do the necessary work. The intelligent investor may be the most easily trapped, thinking that it is all pretty easy. Those who have initial luck — a hot tip or source, an excessively large position in a stock that makes a good move — are the most vulnerable.