Saturday, May 24, 2008

When there's nothing to do, do absolutely nothing !

Sorry for the recent lack of updates; work has been hectic and I have had a busy schedule. By early June 2008, I should be more free to do regular reviews of the companies I own and to continue my behavioural finance as well as investment sins series.

Today I will examine the concept of "doing nothing", which is seemingly innocuous but can be highly profitable ! Warren Buffett advises that if there's nothing to do, then just sit on your butt and wait. This concept is, of course, totally contrary to a trader's mentality where there MUST be action every minute or hour in order to take advantage of price action, usually gleaned from careful studying of charts and indicators. Most investors cannot resist the urge to constantly buy and sell or to just do something; somehow inactivity makes us feel as though we are not doing enough to earn money from the stock market !

The problem with this feeling (of inactivity) is that it stems partly from how our brains are wired with regards to stereotypes about working hard and earning our keep. At our day jobs (in office), we know we must work hard and be constantly doing something in order to justify our salaries and to let our boss see that we are putting in hard work (so as to earn that big fat bonus or promotion); this ultimately translates into us thinking intuitively that we must always be doing something in order to make ourselves feel that we are getting ahead in life. When applied to value investing, this is totally contrary as most of the "action" occurs when one thoroughly analyzes a company and makes a decision to buy based on margin of safety. The rest of the time is just monitoring the company's progress and checking out other companies to invest in - certainly not the most exciting thing to be doing as it does not involve the heart-thumping adrenaline-pumping action of the stock market.

But what actually drives people to be constantly trading or feel that they should be doing something ? I think this can be attributed to a couple of reasons:-

1) Insufficient research which causes people to jump hurriedly into an investment without doing an objective and rational review of the business. This activity may have started out innocently enough but ended up in disaster should the analysis be faulty.

2) Emotions ruling your mind when you hear of other people making good money; hence you feel you need to jump on the bandwagon too.

3) Thinking you can time and beat the market by always buying low and selling high.

All these flawed concepts can make one end up a lot poorer. Thus, it is always better to exercise caution, patience and good judgement and remember that it is better to do nothing rather than the WRONG thing !


la papillion said...

Hi mw,

Haha, great post! I think it's hard to sit still and do nothing because one who isn't emotionally strong will be find it hard to counter the emotions of greed. When one spots a counter, and waited to buy, but the counter went ahead and rose up without him/her, this feeling is reinforced.

Hope to see more post from you!

PanzerGrenadier said...

Hi Musicwhiz

I went through the same feelings during the good years of 2003-2007, I made a couple of trades once in two-three months and won on majority of my punts. But came 2008, when sub-prime hit, I made more and more bad punts and ended up with realised losses that more than wiped out the gains made this year.

It has been a humbling experience and has taught me to know and appreciate the difference between punting/gambling and investing for the long-term.

This year hasn't been a total washout, my choices in late 2007 included SPC which has helped my equity porfolio weather the subprime storms better than if I had not picked up this defensive counter.

Be well and prosper.

musicwhiz said...

Hello LP,

Thanks for visiting and reading. Yes, it can be mentally tough to resist buying a company till you do enough research. In the meantime, of course, the counter is free to do as it likes, including going up and depriving you of the chance to purchase with margin of safety ! :P

Will try to blog more often (I've got lots of ideas for discussions), but am increasingly busy with my life.


musicwhiz said...

Hi Panzer,

Thanks for sharing some of your experiences; I am sure other readers can also benefit from learning from our mistakes made. Hopefully, this will make us better investors in the years to come !

Perhaps one day we can discuss valuation techniques and corporate prospects. Till then, you take care too !