I have a confession. And its this: some of my best investing returns have been from actions that I didnt 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 Im 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, Im often convinced that when it comes to investing, sitting on your hands can be the most profitable course of action.
Why? Several reasons.
As individual investors, for instance, we lack the massive analytical resources of the professionals.
Were 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 Ive 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 isnt easy.
And so on, and so on.
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 sevenyear period.
Heres 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 Hales 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!
So how best to turn this into hard, actionable and profitable investing lessons?
Here are five such lessons to start with.
1) If youre 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 youre sure a proposed trade stands good odds of beating a low-cost index tracker, dont 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. Its 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 thats lost cant subsequently be re-invested elsewhere, so its often better to keep your powder dry.
4) Timing the market is damnably difficult. While I dont believe that it cant 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 youve bought into a decent business thats 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 youre wrong, figure out your mental blind spots, and try to steer clear next time.
You wont be alone
To me, such lessons seem persuasively obvious even though its 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 wont thank you for the reduced trading commissions. But you might see the benefit in your account balance.
And who doesn’t like gains? That’s why we created this investment dossier, which ought to be of interest to you.
It’s called ‘The Fool’s Five Shares To Retire On‘, and it’s currently free to view. It contains the five shares which we believe could be perfect for building a long-term portfolio. If you’re looking for investment ideas that you can act on right away, this would be an ideal place to start.
Click hereto get instant access without any obligations whatsoever!
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.