Investing is one domain where waiting quietly and doing nothing is often the best course.
Why? Because most often the investment actions we take are mistakes. Behavioral psychologist Daniel Kahneman once cited a study showing that, “every action the individual investor takes has a negative expected return. On average, they lose, and the more ideas they have, the more they lose.” Other studies have shown the same.
This is a hard idea for us to swallow. First, most of us think our ideas are pretty darn good and special. Second, it is very hard for us to sit and do nothing. We live in a world where high activity is prized. We are conditioned to take action to achieve, climb, and prove. And we view doing nothing as lazy and irresponsible.
But investing is different. Doing more is not necessarily better.
John Hempton, who does an investment blog I like, recently wrote about Warren Buffett’s concept of the twenty-punch card (You can read his post here). He quotes Buffett saying:
“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do much better.”
Now whether 20 is the right number or not is not the point. The points are that: 1) We don’t have to do a lot of things to do well; 2) We should think really hard about the actions we do take, as if our opportunities are limited; and 3) if we don’t have high conviction, doing nothing is better.
Hempton, who is a pretty thoughtful investor, takes himself to task for admiring the spirit of the 20-punch card concept but not being able to live it. Had he been truly selective and patient, he says, he would have bought stocks coming out of the financial crisis, added one big position in 2012 and then done nothing since. But he adds, “I am incapable of sitting idle since 2012 . . . and so I do stuff. Inferior stuff.”
Were Hempton as patient an investor as he aimed to be, he could imagine this scenario:
“ . . .a client might ask me what I did last year and I would say something like:
a) I read 57 books
b) I read about 200 sets of financial accounts
c) I talked to about 70 management teams and
d) I visited Italy, the UK, Germany, France, Japan, the USA and Canada
but most importantly I did not buy a single share and I sold down a few positions I had.
And I underperformed an index fund.”
How well would that fly? Probably not so well. But his point is well taken: It would be most valuable for investors to spend most of their time learning about how the world works and staying patient, while spending very little time buying and selling.
