Warning – This post will be advocating the buying and holding of investments over a medium to long term time horizon. If you have a history of over-trading, please consult a doctor before reading.
With that warning out of the way, let’s begin. I love the motto in the title of this post. If I had to have a motto for my investing strategy, that would be it. Don’t just do something, sit there. It encompasses so many behavioural issues arising from buying and holding onto investments:
- Constantly checking stock prices
- Panicking about what to do if a stock in your portfolio falls 5%
- Panicking about what to do if your portfolio falls 5%
- Thinking that the more active you are, the more money you’ll make
- FOMO (Fear of Missing Out). All my friends are piling into stock X, should I sell something so that I can join them?
Thinking about it, investing really is all about the psychology, isn’t it? Buying companies that are reasonably valued is the easy bit. The real issue comes in that time between buying an investment and selling it. That’s where the pain arises. I posted this graph on Twitter last week:
Which company is this? Take a guess. OK, don’t. It’s Netflix. From IPO to present day, Netflix has gained 12,300%, equating to 38% a year. Few investments beat that. Unfortunately few people actually made that amount, due to the graph above, which represents the quality and quantity of drawdowns (peak-to-trough declines) over that period. Netflix got its ass kicked on a regular basis. So who did better? The guy trying to time the market, or the gal who locked it up for 15 years?
Obviously with hindsight it’s easy to make this kind of judgement. Nobody but die hard believers anticipated Netflix growing by such a significant amount. But the point is, if you do your due diligence, your hard, in-depth research up front, it’ll make it easier to sit through the tough times. A clear, defined buy rationale will be something you can refer back to during moments where you’re inclined to waver.
Yesterday I watched Joel Greenblatt’s presentation at Investors at Google (a series I highly recommend). Part of the presentation focused on the investment returns from the top performing mutual fund during the period from 2000-2010. Greenblatt found that this fund returned 18% per year for those ten years, handily beating the S&P 500 which was flat during this time.
He then notes that the average investor in that fund managed to lose 11% a year. Why? Because investors tried to time the market. They fell foul of the old adage: buy low, sell high. They did the opposite. When the market/fund did well, they bought in. When it fell, they sold out. Had they held, they’d have seen 18% a year returns for a decade. Phenomenal.
I’ll leave you with a quote from Philip Fishers’ ‘Common Stocks and Uncommon Profits’:
Finding the really outstanding companies and staying with them through all of the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.
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