Why Frequent Trading Is Bad Practice

The markets were nothing short of wild this week! I could almost hear the groans coming out of Wall Street as stock traders reacted violently to every tariff-related news thread. Just as traders adjusted to a plunging market, the indexes would rally like never before, causing huge losses on trades. Then, it would reverse again.

In the short term, stock prices are completely unpredictable. Those who trade such movements will lose money over time, every time. Like a slot machine, you might experience some wins along the way, but eventually, the machine will take all your money.

Late last week, the Dow Jones Industrial Average saw a 1000+ point plunge on Thursday, and a 2000+ plunge on Friday. Monday and Tuesday this week started out higher, but then closed lower by over 300 points each day. Then on Wednesday, the Dow had dropped over 1700 points when an unexpected tariff announcement suddenly and abruptly sent the average higher by 4600 points, closing up over 2900 points for the largest gain in over 17 years!

How does anyone trade this market when they can't predict one minute to the next what some politician will do?

The truth is, it's nearly impossible! Trying to predict stock prices over a one to two year time horizon or less is a gamble! If you get it right, it is not because you were good. It is because you got lucky (excluding the possibility you had inside information).

The markets have mostly moved lower this year, and every few years that just happens. They move a little too far too fast, and then we see a correction or bear market. Then the long-term growth resumes.

One of the best strategies ever is to simply buy and hold. Yet in spite of all the math, in spite of all the evidence, there are still those who believe they can beat the system. It is also important to choose wisely when deciding what to hold! The same argument could be made when choosing WHO to invest in, versus WHAT to invest in. When we get married, we "buy and hold", and when holding the right asset, our lives can be very enriched. But holding the wrong one can be detrimental!

The most famed and successful investor of all time, Warren Buffett proved this point when he placed a 10-year $1 million bet against the entire hedge fund industry. In 2008, Buffett bet $1 million that by buying and holding the Vanguard S&P 500 Admiral Mutual Fund over a 10-year period, he would outperform any hedge fund manager actively managing money. Buffett's Bet with the Hedge Funds: And the Winner Is …

Buffett won the bet, documenting and proving the math behind his words. Of course, all this math was documented previously by Buffett's mentor in the 1940s, Benjamin Graham, author of The Intelligent Investor. Benjamin Graham - Wikipedia

To show how insignificant a bear market is to the history of America, all we have to do is pull up a long-term chart of the Dow Jones Industrial Average:

From this graph, we can clearly make out the economic anomaly of the Great Depression (where the Federal Reserve "engineered" an economic collapse, coercing politicians to abandon the gold standard, their competition). We can also see the "Great Financial Crisis" of 2008. But neither of these economic events marked the greatest stock crash of all time. That event took place on October 19, 1987, when the Dow Jones Industrial Average plunged 22% in a single trading session!

Looking at the chart, the 1987 crash doesn't even register as a blip in history! It was just that insignificant, but you would never know it listening to the news!

In fact, look also at all the "end of the world" news events listed on this chart. Did any of it matter over the past 100+ years? Nope!

If you (or your grandparents) had simply bought quality stocks regularly over time, the wealth generated would exceed your wildest dreams. All we have to do is turn off the news, invest in quality companies, and sit back to enjoy the ride. And NEVER underestimate the ingenuity and determination of a body of people empowered with economic freedom to create and produce value! It is this core value that has made America the wealthiest country in world history!