I have a confession. And it’s this: some of my best investing returns have been from actions that I didn’t take, as opposed to those I did take.
In other words, you might say, I profited from laziness, inertia and indolence.
Well, yes. I dozed through the dotcom mania, overlooked the banking boom, and totally missed ‘peak oil’ and huge fortunes to be made in oil and gas shares.
That said, if I’m being more charitable with myself, I can certainly come up with other — and more flattering — descriptions: hard-headedness, farsightedness and an ability to ignore hype, for instance.
But the fundamental facts remain.
Simply put, I’m often convinced that when it comes to investing, sitting on your hands can be the most profitable course of action.
Human frailty
Why? Several reasons.
As individual investors, for instance, we lack the massive analytical resources of the professionals.
We’re also notoriously prone to the quirks, blind spots and biases that make the study of behavioural investing such rich fishing waters for psychologists and economists.
Moreover, as I’ve observed before, many investing decisions are binary in nature — sell this, buy that — and you need to get both of them correct for a given action to be judged a success. Which isn’t easy.
And so on, and so on.
Hard evidence
For proof of all this, look no further than some of the research by behavioural economists and academics Daniel Kahneman, Amos Tversky, Terry Odean and Brad Barber.
Odean, for instance — a finance professor at University of California, Berkeley, and a former student of Kahneman — studied the trading records of 10,000 brokerage accounts of individual investors over a seven‑year period.
Here’s how the Nobel prize-winning Kahneman sums it up in his 2011 bestseller Thinking, Fast and Slow:
“On average, the shares that individual traders sold did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the two trades… It is clear that for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came to their minds.”
Or, for another proof point, look no further than Tim Hale’s excellent investment primer, Smarter Investing. As he points out in it, over the period 1984 to 2002, the average American equity fund soared from $100 to $500 in terms of comparative spending power. But individual investors investing in those same funds saw their $100 turned into just $90 — and that during one of the biggest bull markets in recent history!
Five-point plan
So how best to turn this into hard, actionable — and profitable — investing lessons?
Here are five such lessons to start with.
1) If you’re not convinced that a given investment can beat the market, it can be better to just stay invested in the market. In other words, unless you’re sure a proposed trade stands good odds of beating a low-cost index tracker, don’t try. Stay with the tracker.
2) It can be more profitable betting against the herd, rather than going with it. At the moment, everyone is selling out of oil, gas and mining. To me, that indicates that there may be excellent buying opportunities around the corner.
3) Buy businesses, not hype. It’s easy to get carried away by great-sounding businesses and charismatic silver-tongued executives. So look at the numbers, and ask yourself some tough questions. Money that’s lost can’t subsequently be re-invested elsewhere, so it’s often better to keep your powder dry.
4) Timing the market is damnably difficult. While I don’t believe that it can’t be done, I do believe that a strategy of ‘long-term buy and hold’ — that is, buy, and then pretty much do nothing — is a better course of action for many of us. Especially if you’ve bought into a decent business that’s just going through a tricky patch.
5) Learn from your mistakes. In my experience, many people make the same core mistakes, again and again. Admit you’re wrong, figure out your mental blind spots, and try to steer clear next time.
You won’t be alone
To me, such lessons seem persuasively obvious — even though it’s equally clear that many private investors appear to do the exact opposite.
But take a look at the strategies of such super-investors as Warren Buffett, Anthony Bolton, Sir John Templeton, Howard Marks and Seth Klarman, and you can easily see that they, too, often follow such investing principles.
So in the spirit of an end-of-year self-audit, ask yourself if you too might at times be better off doing nothing.
Your broker won’t thank you for the reduced trading commissions. But you might see the benefit in your account balance.
