Don’t just do something, stand there.

“There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play” – Reminiscences of a Stock Operator

Laziness and sloth are considered character flaws in most senses, but the counter-intuitive nature of investing flips them into virtue. First of all, it gives you an important edge over the average institution, who is under pressure to show results every month, quarter and year, which means that they are almost compelled to be invested in the latest fad.

The second reason is that investors have a persistent tendency to overreact to recent events, over-weighting their effects and extrapolating them far into the future. Daniel Kahneman once said: “Nothing in life is as important as you think it is, while you are thinking about it”.  Wish I could have had that sort of insight all those nights sweating over the next day’s exam during school.

We’ve seen some major events this year, with Brexit and Trump winning the US election. Closer home, everyone is talking about demonetization and its effects. I have no doubt there will be economic consequences for all of these three events, but the trouble is: macro-economics is more complicated than people realize, humans are terrible at forecasting and when you put these two together you realize that there are really two categories of macro-forecasters: those that know that they don’t know, and those that don’t know that they don’t know. The behaviour of complex adaptive systems such as the economies of countries involves second order effects that are often not apparent immediately, not that that this deters the research houses from coming out with an “effects of event x” publication hours after the fact.

Time and time again, we see that investors choose to do something, often to their detriment, rather than do nothing: a phenomenon known as action bias. It is an inherently human characteristic, one non-investing instance of which was made famous by the Kaheman’s research into behavioral economics: the study of goalkeepers reacting to penalty kicks. The study showed that if goalkeepers were behaving rationally in reacting to probabilities, they should have stayed in the center 28% of the time, rather than the 6.3% they actually stayed.

So what is an investor to do? Remembering Graham is often a good start

“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment” – Benjamin Graham, The Intelligent Investor

(1)  Don’t read market news during market hours. It is remarkable how much noise you cut out from your day by disabling notifications from news apps. I think the same goes for stock price quotes, the market moving 1-2% on any given day is fairly normal (the media will have you believe the sky is falling though)

(2) If something significant happens, wait till the weekend to read about it at leisure. I dislike being rushed into anything, most of all forming snap judgement based on insufficient information, and I believe that having a few hours of peace to sit quietly to read and think is essential.

(3) The less often you trade, the less you pay in taxes and brokerage, and it reduces the chance of error when reallocating capital. Whenever you reinvest the proceeds from the sale of another investment, you can go wrong twice: in the sale (the stock continues to go up many times over) and in the new investment ( you buy a dud). Thus you need to think long and hard about portfolio changes. Prevention is usually better than a cure, so avoid getting into a position where you have to think about selling often. John Templeton used to have what he called the 100% rule, meaning the upside should be at least twice as high before swapping out a position for another.

(4) Finally, be like a warrior who spends most of his time sharpening his sword and honing his skills for battle. He knows he might be called upon to fight only a few times in his lifetime, but the time he spends developing his prowess will make the difference between glory and death. Investing, like warfare, is 99% preparation. Read. Study. Plan. Execute.




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