There seems to be a prevalent misconception that the stock market is a thrilling, exotic world of constant action.
The image is a crowded trading floor with frantic traders desperately trying to drown each other out by shouting “Buy! Buy! Buy!” and “Sell! Sell! Sell!” In this fantasy world, $20 bills rain down like confetti, and cash registers constantly ring in the background from all the winning trades.
Surprise! Earning large returns in the stock market does not involve this fictitious world. Most of the time, sound investing is not dangerous, thrilling, fast-paced or lavish. In fact, it’s pretty boring.
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Making winning trades isn’t likely to involve nights of sipping champagne and doing cocaine in nightclubs while wearing a $2,000 suit, as movies about Wall Street excess portray. Big profits are much more likely to involve nights of making Excel spreadsheets and reading financial reports.
There’s no shouting “Buy!” or “Sell!” In fact, 99 percent of the time there might not be any buying or selling happening at all. Instead, many days are spent simply watching and waiting for opportunities.
Casinos Are Exciting
Buying and selling 20 stocks a day or filling a portfolio with deep out-of-the-money options that could potentially produce 1,000-percent returns in a week would certainly be thrilling. Gambling is fun, but gambling is what it is: It’s not a way to consistently make money; it’s a source of entertainment.
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The stock market can be just like a casino if it is treated that way. If no research goes into trading, if buys and sells are made based on whims, emotions and speculation, trading would definitely be exciting. Friends and neighbors would likely be impressed by stories of crazy trades. There would be a handful of big winners but more than a handful of big losers.
One of the good things about the stock market is that, unless retirement or another large financial commitment is looming, there is virtually no time limit on trades. Making money is simply a matter of buying, waiting and selling. Sometimes the wait is a couple of minutes, sometimes it’s a couple of weeks and sometimes it’s a couple of years.
Boring Patience Is The Profitable Virtue
In 1973, billionaire Berkshire Hathaway, Inc (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett took an initial position in the Washington Post Co. for $10 million. About a year later, Buffet was down over 20 percent on his initial Washington Post investment. However, because of discipline and patience over the following 30 years, Buffet eventually accumulated a gain on his Post position of $1.7 billion!
Only Warren Buffett knows how many nightclubs and $2,000 suits were involved in that legendary trade, but there was certainly plenty of watching and waiting.
Many times, the most critical part of a winning trade is the waiting. It may not be glamorous or exciting, but patience, hard work and discipline are critical to success in the stock market.