"You're on ten on your guitar. Where do you go from there? You put it at Eleven. Exactly. One louder." - Nigel Tufnel Spinal Tap
Like the heavy metal music scene that Spinal Tap was poking fun at, the investment industry is full of the same desires to have more of everything – only here it's money, information and activity. Wall Street and the media feed the idea that more activity is a good thing for investors. Additionally, professional money managers have the urge to make it look like they are doing something to justify their cost. Investment firms think they can get an edge with more, too. Their thought process might be, we have 100 analysts. Where do you go from there? We get another analyst.
Does trading more often, or having a few more MBA analysts on staff really make a difference in investing performance? Will that one analyst help you achieve the ability to know everything everywhere? Institutional fund performance indicates neither activity or more "qualified" staff actually help beat average results. According to SPIVA, more than 60% of active funds underperform their respective benchmarks.
If we've learned anything from Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) at Berkshire Hathaway (BRK.A)(BRK.B) as well as many successful business owners, the big money is made by holding a few quality companies and letting them compound over the long term. That would then indicate that less is actually more.
Just as Claude Debussy once said, "Music is the space between notes," we say investing is the space between purchase and sale. Merely playing notes is not music, just notes. Merely purchasing and selling is not investing, just purchases and sales. The space between purchase and sales is where compounding occurs, so it would be foolish not to have what Albert Einstein called the eighth wonder of the world on your side. If investors look from this perspective, they might tend to choose more high quality companies as well.
Next time you think about purchasing or selling a security, it might be beneficial to step back and be reminded of the space between purchase and sale. Churning it up to 11 will only make it more likely you will do poorly. This is where Warren Buffett (Trades, Portfolio)'s idea of a punch card really comes in handy.