Avoid Stock Market Impulse Shopping

Posted on May 28, 2015 at 2:22 PM PDT by

We are, without a doubt, the most highly trained consumers in the history of the world. Sure, people have been buying and selling for centuries, but how many cultures before us had it down to such a science?

Stores line up candy at eye level, drop subtle lighting hints on new shoes and jewelry, give us every reason to buy now, not later, whatever the category or need. Courses on retail are taught in our colleges, while companies spend millions mocking up shopping aisles in order to test out new ideas.

stock market

Investing is no different and never has been. Stock brokers have long been trained to sell what’s known as a “story stock,” that is, a company with a tale behind it. People are drawn to the idea of a superstar CEO, an amazing new product or a fundamental shift that creates an opportunity.

We love stories. They help us understand the world. A conflict must be introduced and resolved, with a beginning, middle and end, and a moral is usually attached that ties things up with a neat bow.

Yet the real economy is far more quixotic and humbling. Products are introduced too early or too late. Perfectly good companies are crushed out of existence. Perfectly bad companies stay around for decades, inexplicably surviving.

Great managers fail to save the day. Stocks that should go down instead go up and vice versa. Meanwhile, incredibly boring companies — firms with truly no story to share and no uplift in their mission — they just grind on, growing and paying dividends.

When we buy individual stocks, two things can happen. We can ignore them or pay attention to them. They will perform to expectations (or they will not) regardless of how much we personally care about the story behind it all.

Yet what drives that initial impulse to buy is often the story, the hot “tip” we get from a friend, the idea that we have the inside track on something big.

In the end, if you buy, say, 50 individual stocks, you are likely to make money on some of them and lose money on others. Some will pay dividends and some will cut their dividends.

And the lot of them are likely to grow their earnings at a rate that is somewhere north of the inflation rate, once you count reinvested dividends.

Stock market stories

Once you accept that, there’s no reason to buy 10 or 20 or 50 stocks when you can diversify dramatically by owning hundreds or thousands of them in an index fund. You still get that earning growth and dividend inflows, but your individual “story stock” risk goes away.

Because you didn’t impulse buy, you are far less likely to impulse sell, too. And so the growth engine rolls on, year after year, with no worries at all.

Investing could not be any easier than that. If you want a good story, go to the movies or get a book from the library. If it doesn’t end the way you like, you can always see the next show.