The Power of Doing Nothing

Cases to demonstrate the worst enemy for investors, and how to tackle it

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Mar 26, 2020
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“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

- Warren Buffett (Trades, Portfolio)

The best-performing mutual fund for the first decade of this century was the CGM Focus Fund. During the ten years covering two recessions, the fund managed to generate an 18% yearly return, compared to the almost flat performance of the S&P 500. That means every dollar at the beginning would turn into more than five dollars in the end.

Ironically, according to research by Morningstar (MORN, Financial), the typical investors in the fund lost nearly 11% annually in the meantime. You read it right - an 18% gain vs. an 11% loss.

The CGM Focus Fund’s shareholders are not alone. Other studies indicate that equity fund investors underperform the fund itself on average (e.g., by over 6% per year between 1991 and 2010, according to Davis Advisors). The reason is not too complicated to understand – people are particularly good at buying high and selling low. They are easily exposed to the impulse (from media, so-called advisors, friends and neighbors) to trade actively, through the ups and downs. They tend to chase performance, engage in panic selling and adopt short-term thinking encouraged by daily prices. They have not realized that nobody can time the market consistently, putting themselves in quite a disadvantageous position in the already highly-competitive marketplace. They, the investors themselves become their own worst enemies.

Arguably, the worst enemy is universal, and not just related to mutual fund investing. Per Fidelity’s analysis of accounts between 2003 and 2013, the brokerage’s top-performing accounts were from investors who were dead, and the runner-up group consisted of those who had forgotten their accounts at Fidelity.

So how would we, as investors, tackle our worst enemy, which is ourselves? Below are a couple of suggestions we recomend practicing:

1) Every time you are tempted to trade, question how you have the advantage over the counterparty.

2) As more trading activities inevitably lead to more inferior results in general, keep in mind that any trading decision should theoretically have a sizable odds of losing money, at least for the short run.

3) For enterprising investors, figure out whether or not to buy stocks rather than when to buy them.

4) For "average Joes" who pursue a passive approach, set it up and forget it.

5) Stay away from financial media and “experts” that emphasize market trend, timing, volatility or short-term trading.

6) Just turn off the TV and Internet if you are emotional and do not like what you are seeing.

7) Stay disciplined and focused.

8) Try to do nothing, whenever possible.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.

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