News or Noise? The Importance of Doing Nothing

A friend of mine likes to say that, despite his love of flying, he'll never understand sky-diving. "Why would any sane person jump out of a perfectly good airplane?" The answer, of course, is maybe that no fully sane person would. Perhaps you need to be just a little bit crazy to want to try something so adrenalized, so mind-bendingly dangerous.  

Which is a lot like investing in individual stocks. It's unquestionably far safer to set our retirement fund to auto-purchase a little bit of an S&P 500 index every pay period (SPY), and then forget about it. We could just stay on the plane and land with it. But some of us are a little nuts. We believe we can reach the ground faster, and with a huge grin. 

In today’s stock market, it feels like huge swings come every day. The ups are easy, and we don’t much care where the surge originates. But the downs … It can seem like you're suddenly falling through the sky, but you don't remember jumping. Small news items ("The Federal Reserve might wait a little longer to cut interest rates by a quarter-percent..") send Wall Street traders reeling. Online forums are awash with so-called strategies to deal with the fallout and financial TV commentators scream "SELL!". 

Individual investors must struggle to keep our wits about us, and our portfolios intact. Chaos today distracts us from profits tomorrow. Some of us stare into the gloom and actually forget what our goals were, or how we intended to achieve them. The red in our portfolios combined with media frenzy generate real fear. 

It’s difficult to remember this is normal. Market moves sometimes feel like Armageddon. This is our life savings! But it happens, and we’ve seen it before. ‘Corrections’ take place every couple of years and substantial day-to-day swings happen all the time. 

When your assets are slashed by 2-4% in a day, it stings. Take a breath. Get a massage or a cocktail or go for a walk, and think it through. This is all just the other side of the coin on Wall Street. In fact, it’s the frightening moments like this that make public companies the fastest rising asset class over time. That speedy growth is a reward for the scary drops and the volatility. It’s what we signed up for, and it’s why we invest in stocks. 

You knew it would be difficult. Not because we don’t know how to do a discounted cash-flow model or what a moving average is supposed to mean and so, ultimately, we can’t decide what stocks to buy. In actuality those are just practical, tactical decisions and are not so tough. Analytical skills can be learned: understanding an income statement, debt ratios, competitive market analysis, and so on. We’ve talked about assessing businesses here before. And the 6 critical criteria. And what financial data matters.

What makes profitable investing so difficult to master is that it’s more an art than a science. To be among the very best individual investors you must have focus, grit, and an iron stomach. Especially, you must be able do something truly rare: manage your fear. 

Harder than it sounds. In fact, the overwhelming majority of mutual fund managers are no better hanging on through downturns than anyone else, even with their MBAs and years of practice. According to the New York Times last year, from 2017 to 2022, not one of the 2132 studied funds

You have to see through the haze caused by past  
performance, standard practice, and groupthink

beat the S&P 500 index every year. Not one! These are experienced professional managers. They're highly paid. They’ve been trained in deep math, asset diversification and market psychology. So then why? One reason is that the managers we hire are often more impacted by those tiny news items— ‘noise’— than the rest of us. They breathe CNN Financial and Fox Business and Bloomberg feeds all day long, so they have trouble seeing the forest for the trees. They care a great deal that there's threat of a product liability lawsuit, or that the C.F.O. retired, or that the 3rd quarter results were a little thin. How does that matter over a 10-20 year timeline? As a result many managed portfolios are all churn and no return. 

Investing is hard because we have to separate the news from the noise on social media, news sites, TV. If we sell every time things slide a little our investment strategy quickly morphs to ‘Buy high, sell low’. Tough to make money with that approach. 

Investing is hard because we have to ‘be greedy when others are fearful’— Warren Buffett's most-quoted line. Which is to say when those around us are panic selling and running for the hills, we need to stand brave, scouting for bargains to pluck even as the stampede worsens.

Investing is hard because we also have to ‘be fearful when others are greedy’: if the kids’ soccer coach and the plumber and the Uber driver are all talking about their Nvidia profits, it might well be time to trim our holdings and take a long trip— it’s going to get ugly. 

Investing is hard because it means decoding Wall Street jargon, a financial dialect deliberately conjured to confuse and scare us into hiring “experts” to manage our investments for a fat fee. 

Investing is hard because putting our savings into the market means not buying something fun today in the hope that we’ll have the ability to work less decades from now.

If Jim Cramer's 'Mad Money' was a stock, I'd sell

Perhaps most importantly, investing is hard because it means fighting the constant urge to do something, anything, to speed or improve our returns. When really what’s best is generally doing nothing at all. Investing well is boring stuff, a bunch of totally front-loaded decisions followed by years of sitting on our hands. 

But how else can we do it? Even the widest-held stocks these days are off-the-charts volatile (Microsoft, Tesla, Apple, Amazon, Nvidia), so the financial media machine uses that to frighten us and take our money. To protect us. The market has terrifying long drops, during which we watch our hard-won gains gutted. And never in all our schooling (even the MBAs!) do we get the emotional training for proper long-term investment strategy. 

A little crazy can be a good and necessary thing.