“To attain knowledge, add things everyday. To attain wisdom, remove things every day.”
― Lao Tzu
One of the wonders of the modern world is our access to information. The answer to (or at least someone’s opinion on) every question under the sun is right at our fingertips, just a google search away.
But this limitless information and the apparently continuous increase in the pace of modern life presents a challenge for investors. Additional data at an ever faster pace create more decisions and tempt one to increase their activity. But with investing, the quality of decisions matters more than the pace.
Warren Buffett’s version of quality investment decisions is defined by the “twenty punch card” test. In a recent post, Australian investor John Hempton goes into detail about this approach, but here’s how Buffett describes it:
"I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."
This is very difficult advice to follow, as Hempton outlines in his article, and likely really bad advice for most if followed literally. But I do think it’s an instructive concept to consider. Fewer decisions but better ones. Limit mistakes. As investing legend Charles Ellis called it, "winning the loser’s game.”
Thinking carefully about our investment decisions becomes even more important as our access to information (deal flow) and as the pace of life and markets accelerate.
Ben Carlson wrote a post a while back on technology speeding up markets. In the post he quotes Vanguard’s head of fixed income trading before his retirement from a three-plus decade investing career (emphasis is Ben’s):
One big difference between when I arrived at Vanguard and today is the speed of the markets. In 1981, when a news event occurred, you could sit and contemplate it. If something happened overseas, it might not affect U.S. markets, and if it did, it took a day or so. Now geopolitics is so much more important. Everything is instantaneous. We have to make snap decisions all the time without waiting.
But we know that the data show those who increase their trading to match the increased speed of the markets do themselves harm.
In a study by Brad Barber and Terrance Odean of 65,000 investors over the period from 1991-1996 showed that net of all costs, the 20% of investors with the highest trading frequency earn 7% less(!) than those trading the least.
Source: “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” by Brad Barber and Terrance Odean
So does this matter to you? Should you care the markets are getting faster?
Probably not, as long as you create space, or a buffer, between your actions and the volatile market movements of the last couple of decades. The advantage of being a long-term investor is you can safely ignore volatile weeks like the one we experienced in June with the Brexit vote (where the S&P 500 Index moved cumulatively over 10% in five trading days) and the volatility that may be looming around the corner with an upcoming presidential election.
While the increased pace of the markets may make it more difficult than ever to block out the noise, it’s still important, as Buffett says to “think carefully” about our investments. So here are three ideas to consider in order to create buffers and the space necessary to make good investment decisions.
1. Take a break from technology and turn off financial TV. Wall Street Journal columnist Jason Zweig was interviewed recently on the Investor Field Guide podcast and said the following (emphasis is mine):
I think the more time you spend reading...maybe go in another room, sit in another place…it opens your mind to different possibilities and kind of cracks open the crust that the usual source of information will layer on to your thinking. So the people I respect, I try to create a little extra space for. I think it's so important to keep your focus on thinkers who are good for you and just as people being treated for addiction or other mental illness need to pay attention to their mental hygiene; investors need to pay a lot of attention to how hygienic their environment is. If you find yourself watching CNBC all day long with the sound on then you’re probably overexposing yourself to short-term influences....if that’s all you’re taking in all day long…you’re really contaminating your thinking in way that can be dangerous.
2. Know what you won’t invest in. Investors have more options now than ever. Really love Facebook and Twitter? There’s an ETF you might like (SOCL). Think Drones are going to change the future and are worthy of an investment? Then IFLY might lift your portfolio to the next level. Want to tap into the “the rising spending power and unique preferences of the U.S. Millennial generation?” No problem with the Millennials Thematic ETF from Global X (potentially making your portfolio “on fleek” as the kids might say).
Instead of getting sidetracked by each new product offering churned out by Wall Street, have an investment philosophy that outlines what type of investments you will consider and more importantly which ones you won’t. As Steve Jobs once said:
“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.”
3. Solicit advice. Get a second set of eyes on your work. You may have failed to consider critical perspective. At a minimum, it prevents you from making a rash decision. In his post "Crackpots Work Alone” Bob Seawright puts it like this:
Working collaboratively and in community lessens the likelihood that our work will be fraught with the bias to which we are so prone and increases the likelihood that all analysis and any conclusions drawn therefrom will be questioned, checked and tested.
Everyone wants to be a contrarian investor, but perhaps the real contrarian investor is the one who creates the space necessary to slow down as the rest of the world speeds up. Or as Tom Petty says, "The waiting is the hardest part.”