You Lack the Focus to Be a "Great" Investor

Here’s a reality check that every investor needs to hear:

You’re not a ‘great’ investor and probably never will be.

That is if your definition of being a great investor is outperforming the stock market.

In this post, I explain how our limited attention causes investors who try to be great to lose time and money. I’ll explain a rational definition of what makes a ‘great investor.’

It’s simply not possible to stay on top of every stock

At the time I write this, there are about 58,000 companies listed on the various stock markets around the world.

Question: How can any individual investor possibly know enough about these companies to have any clue which ones are about to go to the moon and which will go bankrupt?

Answer: They can’t.

Question: So, how does an investor who picks individual stocks decide which companies to buy, which companies to sell, and when?

Answer: Whatever companies are grabbing headlines at the moment.

Research has shown that individual investors tend to trade stocks that are making headlines or are trending on social media. It doesn’t really matter if the stock is being hyped up or if it’s plummeting in price—as long as it’s being talked about, people will invest.

Trading “popular stocks” is an easy way to lose money

I will share a blurb from my book The Rational Investor that explains why trading attention-grabbing stocks results in terrible investment returns.

FYI—Paid subscribers can pick up their copy of The Rational Investor here , and free subscribers can buy it on Amazon.

A 2021 research paper titled “Internet Search, Fund Flows, and Fund Performance” used Google search volume to measure investor attention to explore the connection between investment funds that were grabbing headlines and the future performance of those investments.

If an investment fund saw a spike in Google searches, the researchers wanted to know how much money poured into the funds after that spike in traffic and how the fund performed.

They found that retail investors were more likely to buy these funds that generated online buzz. Unsurprisingly, these attention-driven investors had negative future returns.

It’s a pretty simple picture to paint.

• Search traffic for an investment fund is highly correlated with its past returns.
• Once a fund does really well, it gets investors’ attention.
• Investors pile into the fund, expecting the fund to continue to outperform.
• This is called “return chasing.”
• Predictably, these superstar funds tend to perform poorly after everyone has piled into them.
• The most recent investors who bought at the top lose the most money.

The most relevant quote from the paper:

“Investors cannot generate superior fund-related future returns when they exclusively follow online buzz and associated suggestions.”

This explains why the most traded stocks on Robinhood lost 4.7% the following month. Making investment decisions based on what’s “popular” is utterly devoid of logic.

Redefining what it means to be a great investor

Here’s the best news you’ll hear today:

To be a great investor, you do not need to pay attention to what happens in the stock market on a day-to-day basis. In fact, it’s better if you pay it no attention at all.

Once you’ve read the Rational Investor, you’ll realize that your odds of beating the market are about the same as getting stuck by lighting while picking the winning lottery ticket on the 29th of February.

Being a great investor is not about beating the market but mastering the art of doing nothing.

A good investor captures the market’s average return—minus investment fees—for as many years as possible.

Or, put in the simplest possible terms, They buy a handful of globally diversified index funds and sit on them for a few decades.

Once you know what index funds are and how to invest in them , long-term investors can more or less go on autopilot. That means ignoring the pointless discussions about which stocks are hot and the doomer content about how markets are about to come crashing down.

A great investor will use that extra time provided by a passive investment strategy to make more money and cut back on their expenses to find more money to invest. Great investors focus on what is in their control—what they invest their money in, how long they stay invested, and how much they invest—and accept that they have no control over what happens in the stock market.

Focus your attention on what matters and tune the rest out.

A version of this story was originally published on the Making of a Millionaire Substack , the home of my writing. As a thanks for reading my work, existing readers can get 75% off their first year’s subscription here.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.