The Art of Doing Nothing
on Thursday, 15 December 2016. Posted in +CatererGoodmanPartners, Caterer Goodman Partners, General, Investments
The hardest thing for the average or new investor to learn is patience. I’m not saying that professional investors are perfect. They aren’t. Still new investors fall into this trap more than the professionals since they don’t even consider it. Here is what you need to know about patient investing. And no, I don’t want to talk about meditation.
The New Account Rush
Let’s say you have opened a share account or investment account. The first thing new investors do is to, straight away,invest all their money. That’s what you opened the account for right? Leaving it sitting there is just wasting time, right? What’s the point of leaving it mostly in cash?
What happens if the market drops 10%?
But consider this from another perspective. What makes today so special as the day you want to invest everything? Are the choices you made sufficiently special? Or are they simply the first that came to mind? Once you buy something, other opportunities are no longer available. What will you do if the market unexpectedly stumbles next week by 10% because of chaos in Greece Debt/Syria/France Downgrade/US Congress? Will you sell or wish you had some cash still around ready to buy? Many people sit on cash for months and years before they invest, then rush to put all their money into the markets in the first week. Why the sudden hurry? Portfolios can and should be diversified not just by shares and asset classes, but also across time.
Staged Entries are best
I recall a client who invested a lump sum in late July 2008, against our advice insisted it all go into the market (March-June had been good if you recall and the rumors on property were still only that) and then disappeared on business travel. They spent ALL their cash and had nothing left when the markets tumbled and nose-dived. By the time we found them, they were down by 35% and by then it was probably better to leave them go through a full cyclic recovery. A staged entry over 3-4 months could have avoided this scenario. Sadly this is a far more common instinct that you’d expect. Many turn off from the markets forever. Better to get a strategy and stick to it.
Sticking to the strategy
A few years ago I read a book that consisted of in-depth personal interviews with about 12 successful and experienced hedge fund managers. The most common regret was “I sold my position too soon – I was too impatient”. Taking the first 30% in profit seemed good, but they left then next 50-150% on the table. When you have a strategy or good idea you should stick to it. Academic research has consistently shown that portfolios that are traded less, outperform. Once you bought it, keep it until your strategy has played out. Warren Buffet’s maxim of “I invest forever” is said with reason. It’s the sole reason he avoids ETFs since they are “too easy” to trade. Getting bored is a huge danger. So how to keep disciplined?
Keep a trading diary
One of the good tips I got years ago is to keep a trading diary. It helps keep you honest with yourself on why you bought something, and why you should sell, when the time comes. How long you expect to hold something. Often, you can convince yourself that you’ve achieved your goal, when you haven’t. It can be quite eye-opening. Keeping this trading diary significantly improves performance, and helps remind you on your strategy. Its your conscience and because it is written down – infallible. Memories are remarkably poor after a few weeks. Big hedge funds and managed funds use it with their traders and it has shown to improve performance.
Is it worth telling Grandma?
There is a client (Steve) I speak to maybe 1-2 times per year who now lives in the Philippines. He prefers not to be bothered. “Call me only if it is really important and a great trade”. We only make purchases or sales, at most, twice per year on his portfolio. This discipline has proved wonderful for Steve since I’ll call him if it one of the best opportunities of the year. He hasn’t had a losing trade yet. These are usually only the very best trades and opportunities. Being patient and ignoring the average opportunities is one of the hardest things to do investing, since there is a constant urge to “just do something”. If it isn’t good enough to call home to your parents or grand parents, then is it good enough for your portfolio?
Be picky – wait
This advice is the most vital when you are first investing a new account. Buying something because “it is doing pretty decent lately with profits” is not a strategy, although this is the most common basis for the home trader. It has no basis in fundamental valuation or any recognized investment strategy. Either do the proper research to find the right share, pay a trained/trusted professional to do it for you, or simply stage your way into an index fund. But picking a company who is growing and hot now is, at best, a highly variable strategy. You’ll end up with the next Enron or Blackberry more often than you buy the next Apple.
So what’s our advice in summary
- Be patient
- Stage into the market
- Be picky about what you buy
- Have a strategy and keep a trading diary
- Stick to your strategy
- Do nothing unless your strategy says otherwise (this is the hardest of all)
We’ve found that the best way to keep ourselves engaged is to keep doing research and reading financial statements to find the next diamond in the rough. If you want spend your time “just doing something”, just do that, and leave the trading passwords alone. Even better, keep the passwords hard and written down somewhere safe where you rarely look. When sitting on your hands, any help you get is useful.