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Beware the 'Stock Market Trading Jones'

Tickers in this article: AAPL AMZN GOOG IBM NKE OAK RIMM
This column originally appeared on Real Money Pro at 8:47 a.m. EST on Dec. 24.

NEW YORK ( Real Money ) -- Today, I see many traders and investors afflicted with what I call the stock market trading jones. Market participants feel compelled to overtrade. It comes in the form of a near-obsession in overtrading both on news-based dislocations (to the upside and downside) and on non-dislocations in the normal course of business, typically through chart gazing. The need to play too many earnings reports and the desire to trade macroeconomic events reside among numerous other catalysts.

There are several obvious influences that contribute to the addiction of too-frequent trading:

  • Brokers. Brokerage companies have made trading at home easy and inexpensive. Sophisticated Internet-based trading platforms allow individual investors to trade actively at markedly reduced commission rates relative to any other time in history.

  • Societal pressures that favor short term over long term . As a society, we have grown increasingly impatient. The media (and for that matter our society) increasingly emphasizes short term over long term and instant gratification over building value through intermediate-/long-term value. Today, we even communicate more briefly than ever in staccato-like form via tweets of under 140 characters on Twitter and the acronym soup of instant messaging. How-to-profit books, teaching us how to gain money and fame quickly, outsell more thoughtful investing books such as Benjamin Graham's The Intelligent Investor . All of these pressures (in the pursuit of instant riches) contribute to excessive trading by individuals.
  • Quick solutions and foolish acceptance of a special sauce to investment success . We too often seek quick solutions to complex problems/issues. Increasingly, traders seek a special sauce, an algorithm or stock chart that evokes the promise of immediate success, often shunning the heavy lifting and time-consuming analysis. In its simplicity, this also leads to excessive trading, as if the appearance of a chart is an almost mystical and certain way to produce the Benjamins. Technical analysis has a broad definition and when utilized intelligently can be a very helpful adjunct in making (and timing) trades and investments. But too often the decision to make so many of these trades is seen purely through the narrow interpretation of a stock chart, a view that historical price action will provide us with a guide into the future. I see this often on Real Money Pro -- particularly in front of an earnings release. Does anyone really think that prior to, say, Nike (NKE) reporting its most recent earnings, a trader can outsmart the legions of other traders by virtue of looking at a chart? Does that really make sense to any of you?
  • Shortening cycles . In our fast-moving world, economic, corporate and investment cycles are ever more truncated. Performance definitions grow ever briefer, whether it is the duration of a CEO's or baseball manager's career, measuring a company's profit performance, investors' patience with their investments (manifested in heavy turnover and reduced holding periods compared to any time in history) or with defining investment performance.