The Power of Doing Nothing

The Power of Doing Nothing

Investing is much different than most other endeavors in life.  Usually, when we want to accomplish a goal, we have to do more.  If you want to lose weight, exercise more.  If you want a promotion at work, stay later and impress your boss.  If you want a good grade in school, study longer and harder.  When it comes to being a successful investor though, laziness pays.

Over the last 20 years, the market has returned an average of 9.85% per year but the average investor has gotten just over 5% of that.  Investors tend to sell out of markets at bottoms (when they should be buying), and buy into markets at tops (when they should be selling).  This phenomenon is commonly referred to as the behavior gap.

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“It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right-but it’s not rational.” – Carl Richards

The longer I’ve been involved in markets the more I understand that our ability to profit from markets is driven mostly by our own behavior.  No matter how many statistics you crunch or how sophisticated the dataset is you use to analyze the macroeconomy, the outcome is fairly random.  Investors have no control over market outcomes.  But that is a really difficult concept to accept.  We want to feel in control.  We need to feel in control.

Dr. Daniel Crosby is a behavioral finance expert who has written his Rules of Wealth.  The 7th rule states:

Do less than you think you should.

During a recent presentation, Dr. Crosby cited a study about penalty kicks in soccer where the authors uncover data that I think is very relevant to our behaviors as investors.  The study examined 459 penalty kicks for two elite French and Italian soccer leagues.  The data revealed that 98% of the time, a goalie would dive either left or right.  This despite the fact that 17% of the time, the kicker would kick down the middle.  The study also found that the goalie’s odds at stopping shots kicked down the middle when he stayed there, was much higher than his odds of stopping shots kicked left or right even when he picks the right side.

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So why does this happen?  Well as Crosby points out, imagine if you are the goalie on a South American team where mistakes have been known to get you killed.  Even if your best odds are to stay in the middle and do nothing, that wouldn’t feel right would it?  You want to leave it all on the field.  But goalies, and investors, get the best results when they are the laziest. 

Nobel laureate William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors.

News Flash:  You aren’t going to be right 82% of the time.

You won’t be a successful investor by literally “doing nothing”, but doing less than you think you should is usually the best course of action.

Winnie the Pooh put it best:

“Never underestimate the value of doing nothing.”

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Further Reading…

The Laws of Wealth

The Case for Penalty Kicks in Soccer

Why Investors Suck


Tim Brennan

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