Introduction
The world we are living in is quite different from the one our parents lived in. This is especially true if we think about having multiple available options.
We can choose between a thousand different things to do in basically any aspect of our life. At the supermarket, there are tons of different toothpaste brands, while at home, we switch on the TV and our streaming service is providing us with hundreds of different films or TV shows. There are also countless available courses we can take on in order to improve our skills and careers.
When it comes to investing, this means having the possibility to invest in multiple types of securities, in different countries and markets and, of course, having the freedom to buy or sell them multiple times a day. Traders can go in and out of stocks hundreds of times a day, using multiple indicators and software that automatically does the work for them.
Studies show that the urge of acting is deeply embedded in our way of living, and it only gets worse when plenty of options are available.
Since the beginning of time, humans have known if we want to survive, we have to go out and do something: standing still could mean becoming weaker and ill. You had to move to find water, food and shelter.
But investing is a different story. You're not being rewarded for the amount of work you do: it only counts what you do and, specifically, the quality of your reasoning, which is behind what you do.
So should we try to be as inactive as possible? Well, not exactly. Successful investors seem to sit on their hands only when you look at their portfolio activity. But I love visualizing that expression, because if you are physically sitting on your hands, you can't do much with them. For example, you cannot click on a mouse button.
There's instead something that we could (and should) do, which is thinking (and reading). We need to move the balance from doing to thinking. So the problem is not the activity in itself: it's choosing the wrong kind of activity (physical versus mental).
A stock is not a piece of paper
The following Warren Buffett (Trades, Portfolio) quote is fundamental to understanding how shifting our focus can help us achieve investing success.
“Shares are not mere pieces of paper. They represent part ownership of a business.”
The reason why most people are extremely active in the stock market is they don't see what a stock actually represents: in their mind, it's just like a black box. Their friends or neighbors could say: “buy it, it's a good stock” or “it will go through the roof”, or “XYZ is doomed,” but that's just small talk. It has nothing to do with the reality, which is obviously complex.
They behave this way because it's much simpler to think about stocks as if they were bouncing balls. You just have to understand the dynamics of bouncing and start printing money. Of course, it only looks simple if you don't have enough experience. The reality is that nobody knows where the market is headed, especially if the time horizon is short. Buffett and Charlie Munger (Trades, Portfolio) knew that from the beginning, and they have never tried to figure it out.
In this scenario, activity is the direct consequence of ignorance. That's why trying to catch the stock price direction seems the only way to make money. Even if you were an expert in high-frequency trading algorithms, life would not be easy as there are so many competitors out there, many of whom could have access to a superior strategy or trading software.
Additionally, we know that high market activity means more fees (and more stress), but this is clearly not stopping people from obsessively trying over and over.
But by simply being aware of the fact that a stock is a part of a business, we can shift our attention from outside to inside the box. We can start asking ourselves: What is the business doing? Why do I believe it will grow (or lose ground) in the future? Is it enjoying competitive advantages? Is the market already rewarding it for its value or not yet?
There's a very important thing that helps me sit on my hands when I would rather click on that buy or sell button: it's the idea that doing nothing is far from producing no results.
Indeed, while we are (apparently) standing still, there are thousands of smart people (the employees of our portfolio companies and their management team) working for us, night and day. If we look at it this way, doing nothing just means letting them work for you and, most of all, not stopping this flow to follow our urge to jump in and out of stocks.
Patient opportunism
Of course, my point is not that of deprecating action per se. Action is indeed much needed at the right time and when the right conditions are met.
A necessary action may be selling one of your holdings because it is approaching your estimated intrinsic value or because you just realized that your investment thesis was wrong (that is, not corresponding to reality) or just unfolded in a way you didn't consider to be possible.
Equally important is choosing the right time to buy. That usually requires your mind to be calm and grounded, only focusing on the why you're actually buying, and not on the action.
For example, we don't want to buy under the influence of F.O.M.O. (the fear of missing out), but only because we've spent weeks or months researching the company and we found it has good growth prospects, a sustainable moat and sells at a market price that incorporates a margin of safety (the wider, the better).
Think about it. Nobody is threatening us to do anything: we shall only move when we're fully convinced and the time is opportune.
Here's a quote from Buffett, taken from a 1974 Forbes interview, that superbly explains this concept:
“I call investing the greatest business in the world ... because you never have to swing. You stand at the plate, the pitcher throws you General Motors (GM) at $47, U.S. Steel (X) at $39 and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
The expression “when fielders are asleep, you step up and hit it” clearly communicates the fact that doing nothing doesn't have anything to do with inactivity. Indeed, during that time, you're fully busy thinking and, consequently, finding the right moment to act.
Conclusion
Nowadays, our life is continuously influenced by the need to do something. After all, if we're not doing anything, we're not producing money for anyone, so pushing people to act is the main purpose of business.
In investing, being hyperactive easily leads to underperformance (or disasters). Learning to control our urge for action is going to be beneficial for our investment progress.
Focusing on the idea that a stock is not a piece of paper helps us to visualize what really happens when we're sitting on our hands (and what would instead happen if we would start using them).
Finally, investment action makes full sense when a set of conditions is met and times are ripe for it. What really counts is the quality of our actions, not their frequency.
