“Inaction” sometimes is harder than “Action”

By | March 5, 2018

In the Forbidden City, there is a large writing on one of the palaces saying “无为” – in English, it means “Inaction” or “Do nothing”, if we have a direct translation. This message was from Taoism to the emperors, meaning sometimes you don’t do anything is better than doing something. The people and society will find its balance and thrive without lots of government intervention.

In terms of Investing, if we exam it at the philosophical level, many times if you don’t do anything is the right decision. During our 15 year investing experiences, one thing we learnt from first hand experience, was that “it is sometimes more important to know when NOT to act, than to know when to act.

Only two actions matter in investing: buying low and selling high. Everything else does not count.

Imagine you are a private businessman that owns a great acre of farm after carefully evaluating the price, the location, the crops and the operations. And you are very set on holding it long term. However, your neighbor, let’s call him Mr. M, comes to you every hour telling you what is the bid and ask price that he is willing to buy from you your farm, or sell to you the same farm next to your farm. Will you enjoy trading with Mr. M every hour he comes to knock your door? Instead, most private businessman would probably politely decline paying any attention to the moody Mr. M’s message and go on doing something else more productive to his life.

However, once in a while, when Mr. M panics, he will probably come to you to sell his same farm next door to you at half the price you think it is worth, in which case you may consider buying from him, before his swinging mood returns to normal. Or some other times he comes to you offering to buy your farm at 100 times earnings today and you think you will have a hard time growing your earnings fast to justify that price, you may be happy to sell to the overly optimistic Mr. M and use the proceeds to find some other opportunities to invest.

You should ignore Mr. M (or Mr. Market) most of the time. Remember he is there to serve you, not guide you. Only time you should trade with Mr. M is when it is moment of panic (you buy) or when it is moment of euphoria (you sell).

Don’t do short term trading. You only make your broker rich that way.

To have an extreme example, if we have top 100 most experienced investors into a room and the rule is to buy and sell to each other so that every month they sell 100% of their position to someone else in the room (and buy 100% from someone else in the room). After 10 years, the only one becomes extremely wealthy are their brokers and advisors, from the commissions and fees of their active trading. Never ask a barber if you need a haircut. If you speak to your broker, they will recommend you to buy or sell because that’s what counts for them.

Today’s financial news media are practically funded by brokerage platforms. The only way for brokerage platforms to have stronger earnings is to encourage players in the market engaging in more frequent trading. Therefore if you open today’s CNBC’s website, you will see all the headlines that instilling “fear and greed” into audiences’ mind and trigger actions to buy and sell. To financial news outlets, their number job is not to report some factual information but to gain the most readerships, thus the more dramatic articles you write, the better you will be rewarded. And do you notice whose advertisements fill their websites? They are from E-Trades, Charles, TD Ameritrade and Car Dealers etc. Can you expect anyone of them to write an article with the title: investors should not act on such short terms news because they don’t matter much longer term? They will run out of advertisement money pretty soon.

What are the recommended actions then?

If you are the type of person that can remain calm and are able to do analytical work for your investment (thus have confidence with your decision to investing in the business), try to stay away from markets during volatile times. To keep checking prices 50 times a day makes your brain wants to conclude some patterns (human nature) to promote a “short term trading strategy”, just like to read pornographic websites everyday gives your brain a lot of other type of suggestions and ideas when you see an attractive person of opposite sex (or same sex).

Strong suggestion is to engaging certain type of sports so that you can practice to master the sport at the same time “burnt off” the tenancy of acting or doing something. At the same time, you probably will have improved physical health and mental state.

 

Below is a list of news that recently flew through various news outlets but you should not pay any attention to:

  1. Jerome Powell’s testimony to congress
  2. President Trump said “Trade war is good, and easy to win”
  3. President’s son-in-law lost his security clearance
  4. Hope Hicks resigned her White House post
  5. BlackRock writes letter to gun makers in its portfolio
  6. Which retailers haven’t yet stopped selling guns
  7. ….

Here is a list of news that matters:

  1. Berkshire Hathaway’s annual letter is published (listen to Oracle of Omaha share his view of today’s market, which is usually more insightful than some mediocre fund manager who doesn’t know how to invest and thinks the market is efficient)
  2. Dicks’ Sporting Goods stopped selling assault weapons in their stores (if you invest in gun maker stocks, you would like to assess long term impact to sales)
  3. New tariff applied to Steels and Aluminum (current tariff and future tariff)
  4. Various companies’ annual reports however only to assess its earning power not to engage in knee jerk reactions in buying or selling. Remember, there is never a moment of buying or selling that is defined as “THIS IS THE ONLY CHANCE”. There are always same or better chances for buying or selling. Don’t over-react.

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