History Says Long-Term Investors Who Build the Most Wealth All Understand This 1 Thing

Have you ever wondered why some investors seem to extract so much more performance than other investors manage to get out of the very same stock market? It's not luck. It's rarely skill or intelligence, either. Indeed, most professional investment managers actually underperform the overall market.

Rather, the members of the relatively small crowd that builds the most wealth over the long haul have one thing in common. That's an understanding and acceptance of what they can't possibly know -- because no one can know -- about the market. Armed with this clarity, these investors can then make very smart decisions.

The crowd occasionally forgets how stocks should be priced

The notion that some things about the stock market simply can't be known is a tough pill for many investors to swallow. The investing industry itself doesn't always help matters either, suggesting that better tools and more information give you some sort of reliably competitive edge on other investors. Perhaps sometimes they can. By and large, though, it's just a simpler, bigger-picture (and longer-term) approach that tends to produce superior results than one that also includes short-term elements.

See, stocks' and the broad market's short-term movements are very difficult -- if not impossible -- to predict. Trying to do so, in fact, can often undermine your long-term performance.

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That's not an indictment of anybody's intelligence. It's just a reminder of a long-understood reality. As Benjamin Graham put it, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." Most investors have a pretty good sense of a company's "weight" in the sense of its potential long-term growth and profits, even after a recession or bear market. Investors' "votes" that drive short-term price movements tend to be driven by emotions like fear and greed, which are impossible to predict.

Knowing what you can't know better defines your approach

Don't dismiss the importance of looking past short-term noise either. As was noted, the clarity that comes with knowing what you can't know and knowing what you can know -- like the fact that the stock market's never not eventually rebounded from a bear market -- is actually quite empowering. You then know exactly what to focus on, and what not to worry about. This will, in almost all cases, result in less trading activity and more buying and holding, sidestepping one of investors' top stumbling blocks. See, we're all eventually pretty bad at timing the market.

Of course, this bigger-picture focus almost always incorporates details like a company's sustainable cash flow, a competitive product or service that can't be easily copied, a healthy balance sheet that isn't getting in the way of growth, and all the other boring fundamental measures that truly matter in the long run, even if they mean little in the short run.

Here's the litmus test for knowing whether or not you're a true long-termer, or if your fortunes are instead tethered to the market's next unpredictable short-term turn: If you're genuinely worried about a bear market or even a garden-variety market correction, you're probably not actually a long-term investor. Consider reconfiguring your portfolio so you won't be lured into making a short-term-minded decision that ends up doing more long-term harm than good.

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