Last Updated June 1, 2012
A long-time reader recently asked:
Once an investor has a strategy, how can he develop his potential? What should he be reading, or doing? Once you have a screen with certain criteria, then what? Its in our nature to fiddle, to feel like we are doing something, so what should an investor do to develop his potential further?
This is a great question that almost answers itself. It gets to the heart of the problem that many active investors have, and that’s the idea that they always have to be doing something.
It just seems natural that if you want to beat the market then you should be working hard because all the big professional outfits have legions of analysts working long hours to invest money for their clients. If hard work is the route to success for them, and hard work is the route to success in most things in life, then surely even more hard work is the route to success as a private investor?
I think that view is understandable, but wrong.
The lazy way to beat the professionals
As an investor, I can more or less match the market with minimal fees by investing in an index tracking fund or ETF. The effort required for that approach is little more than is required to make and drink a cup of tea. If an investor wanted to hold a portfolio of stocks and bonds and rebalance between them on an annual basis, then the effort might stretch to a cup of tea and a sandwich, once a year.
So at its most basic level, investing is not hard and it does not take great amounts of effort to do it effectively, because as most people know by now an index tracking strategy will beat most professional investment managers after fees.
Act like an owner, not an employee
Index tracking works because it makes use of the fact that you own the businesses in which you invest, rather than work for them. There is a clear distinction between owning a company and working for it. In fact, one of the main reasons for owning a business in my opinion is so that you can hire managers who do the work for you so that you can lie on a beach instead, and perhaps read monthly updates on the company’s progress.
Let’s have a closer look at that index tracking strategy. If you buy the FTSE 100 then you own a collection of 100 very large companies, or at least small pieces of them. Each company probably has many thousands of employees, from frontline workers through various layers of management right up to the board of directors. The whole structure of each business should be geared towards supplying you (the owner) with a good return on your investment. Just think of all those thousands of people, working hours every day just to make you money.
That’s my first point then. The job of the investor is not to work hard, but to find other people to do the hard work instead.
That’s not to say that investing is easy; but the hard work that an investor should do is very different to the hard work done by most people.
Work hard, but not often
There is an extreme example of this in the habits of Warren Buffett. Buffett first bought Coca Cola back in 1988 and he still holds it today. That’s 24 years and a whole lot of returns from a single investment analysis and decision to buy.
And that’s the second point. An investor’s work is done almost entirely before an investment is made, and each investment is almost by definition a reasonably long-term affair. This means that there can be periods of intense work when an investment thesis is being developed, but this is typically interspersed by much longer periods of inactivity when there is nothing to do, and it is this inactivity that gets people into trouble.
Buffett has said this himself many times, whether it be the idea that 20 good decisions in an investment lifetime is probably good going (the 20-slot punch card) or that one good idea in a year is an achievement. Investing is not a daily slog, nor should it be.
Many people struggle with the idea of earning money whilst ‘doing nothing’, but understanding and being at ease with that idea is essential to being a good long-term investor.
There’s a quote from Buffett where he says that he goes to bed thinking about all the facial hair that’s going to grow overnight that will need shaving off the next morning, and how that will lead to many more millions of Gillette razors (a Buffett holding) being sold.
Learn, believe, apply, persist, succeed
Once an investor has a strategy, has honed it and used it and moulded it to fit his or her personality, then the main thing left to do is to apply the strategy. It’s all about the diligent application of a sound strategy, not the continuous tweaking and fiddling of a strategy just to give that processing powerhouse inside our skulls something to do.
Of course we must all keep reading and keep learning, especially from our mistakes, but once an investor is past the beginner stage then the job is no longer about accumulating more knowledge, it’s about more discipline, patience, belief and occasionally, doing nothing.