Wednesday, December 2, 2015

Don't just do something! Stand there!!

In the summertime when I was a kid my mom would come into the family room and kick me off the TV. “Go outside. Go do something.” When we’re in school we’re told to work hard, get involved, do our homework, be productive. As adults at work we know we have to perform: tackle assignments, manage the team, track all tasks, host the meeting, complete the project, exceed expectations. At the gym. Around the house. In our communities. Constantly, everywhere, it’s all doing. We are never, never, never supposed to just sit there and do nothing.

Which means it’s all terrible training for investing. No wonder most people fail.

A huge percentage of investors—both hobbyist individuals and professional managers—suffer from action bias, which is the need for action over inaction. This is hardly a surprise given what we’re taught in every other aspect of our lives. So they’ll sell a stock when it falls, afraid it will never return or certain they can move the money to something which will only go up. Or they fear a company of which they own shares is overpriced, so they dump it. Or the nation is going to war, or the Federal Reserve is raising interest rates, or they read the future will be in gold, or real estate, or some financial TV loudmouth who is paid to make hyperbolic alarmist calls says to get out. So they sell everything. Which is the worst thing they can do: the stock market always rises—if we wait long enough.

Life is terrible training for investing. 
No wonder most people fail.

Just sitting there and watching your investments go up and down is really difficult.  We think we can do better. We think we can make our money grow faster. We heard a great stock tip, or a new investing concept, or a buddy is building an app and we can be millionaires. We want to do something to decrease our losses or increase our returns or at least protect ourselves from the crazy nauseating roller coaster ride.

But that’s just it. We have to wait. If we try to speed things up we will make mistakes, we will misjudge and risk and over-leverage. Warren Buffet has said “The stock market is a device for transferring money from the impatient to the patient.” He’s right, of course; he’s been investing for over 60 years. If we get impatient, we act. That’s how we’re built, how we’ve trained since birth: doing better means doing more. Which is false when it comes to investing.

To be clear, there is work to be done. But the lion’s share is at the start of the investment, when we are researching and tracking performance and trying to project forward to determine forthcoming success. We monitor not only the company under consideration but the market operates in, the competition it faces, the trends and buying habits of customers stretching into the future.

But once we pull the trigger and buy ownership in that business, we have to sit on our hands. We still keep up, of course: news reports, press releases, earnings and so on. But that’s it, the decision to become owners was already made. Now, we sit there and let the money we invested work for us. It’s not the same as school, or our work. It’s passive.

As my regular readers know, there are only 4 reasons to sell a stock:
  1. The value of one company’s stock has grown so much that your portfolio needs to be rebalanced to reduce single-stock risk: I’ve sold off Apple shares close to a dozen times since 1997 in order to reduce the percentage of my portfolio in that one company.
  2. The company you own did something that changes the thesis for ownership in the first place: 3D Systems (DDD) massively overestimated the consumer market for 3D printers, and sales have been shockingly bad; Research in Motion (Blackberry, BBRY) completely missed the transition from keyboards to touchscreen technology, and gave up over 60% of its customers in three years (click here).
  3. One stock in your portfolio has been bouncing around below your purchase price for awhile, and you decide to sell for a loss in order to offset gains elsewhere in your tax return.
  4. You’d rather have the money. 
Day-to-day price gyration—of the company or of the broader market—is not among the reasons. If you sell because you can’t stand watching a good company’s price drop, planning to reallocate the money elsewhere or, worse, to go shopping, you will miss on the gains to come later.

By way of example: I currently one stock in particularly bad shape: I bought GoPro (GPRO) in late July, and it’s down 60%. 

“The stock market is a device for transferring money from the 
impatient to the patient.” – Warren Buffett

Down 60%! you say. Why haven’t you given up on it!? I haven’t sold because, regardless of the market price of the stock, GoPro is an excellent company with something like 80% market share f or small cameras and years of solid profitability. It’s got smart managers and no debt and a great brand. It’s going gangbusters, share price be damned. If the company continues to grow and make money, the shares will come back. I might buy more. Isn’t that be the kind of business you want to own? 

The solution is just about never to jump in and take action. It’s to distract yourself however you can and sit tight. I know some individuals who only check on their holdings weekly, or monthly. I have one friend who only looks at his portfolio when the market is closed, preventing her from a knee-jerk sell order she would later regret. Whatever works for you: constant churn of a stock portfolio will destroy your returns over time. Better plan: go watch the game, learn a new recipe, play with your kids. The future will arrive soon enough.

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