How To Win By Sitting Still
The high returns of sloth
How often does an investor describe themselves as being short term? How often do you hear advocates for short term investing?
Of course the answer is almost never, but that message is not being reflected in the data. Over the past 2 decades annual US stock market turnover has averaged over 100%. You can see here on Substack the conflict playing out. Simultaneously investors will talk about the importance of long term investing to their strategy, react to every new news alert or market move, and post quarterly portfolio updates with multiple stock sales every quarter.
The next important questions to ask are why is this discrepancy happening and what are the consequences?
I believe there are a lot of pressures causing this investing dissonance, such as
Constant news, curated to catch your attention by making you worried
The market nature of price changing far more often than business value
The multiple times increase of portfolio accessibility and tradability
The broad elimination of commissions, trading costs, and sales loads
The shortening of attention spans and patience caused by tech
So there are some factors that have always been around making markets more short term focused than the actual change of business, but there are some unique powerful factors currently attacking the investor’s patience
But the more important question is what are the consequences for investors from high trading?
The evidence is abundantly clear, that on average higher turnover = lower returns. In a 21 year study of 2856 mutual funds the top 20% most active funds had 2.4% lower risk-adjusted returns. It’s not just the professionals that get hurt by high turnover. Studies on individual investors demonstrate high turnover is even more damaging to their returns than the professionals.
The market punishes business, and it disproportionately rewards sitting on good decisions. It even often rewards sitting on poorly thought out decisions as there is in individual buys a significant element of luck.
There are two main reasons why lower turnover stock portfolio’s are associated with higher returns.
In broad funds/etfs every year after your purchase date you increase the chance that purchase was profitable. Stock funds in the short run are volatile, but in the long run are predictably profitable.
In individual stocks there is extreme skewness in returns. The data has proven over time that a very small number of all the businesses produce most of the market’s returns. Stock do not really go up 10X over night, and they do not go up 100x overnight. It takes a very long time. So, the only way you will get to benefit from one of the superstocks that define and dramatically lift up your portfolio’s returns is by owning one for a very long time. If you trade your stocks constantly, you will never have a life changing winner.
Many leaders in the field have long found success by emphasizing patience as one of, if not the key lever in their strategy. Some examples of famous successful managers are Terry Smith, Nick Sleep, and Buffet. The reason why these managers liked low turnover is because they found sticking to the best businesses and potential super stocks was their best path to returns. You don’t get the returns of those stocks unless you are willing to do nothing for a long time. Doing nothing is often harder than it looks, just try to meditate for a couple hours to see. So now that we have established the general relationship between turnover and returns, I will briefly show how to more invest like a turtle so you can hopefully achieve better returns.
create decision friction
Imagine if before every stock purchase you had to wait a week or drive a half hour to place an order in person? I strongly believe the result would be less trading. Do not be in such a rush with your money. Your cash won’t be worthless tomorrow. You can create friction and decision barriers through many practical ways if you take a second to think of them.
check your brokerage less
If you check your account value multiple times a day, or every day you will be far more likely to overtrade than the less “aware” shareholder. On a factual basis, you are giving yourself many more opportunities to be worried, think about the state of your portfolio, and make a change. Also, I hypothesize that most active investors would improve their well being by checking their accounts somewhat less often.
humble money’s value
Keep in mind when you worry about your relative performance to the S&P over time, that you will die someday, and you will not take your money with you, and there will hopefully have been people or journey’s that mattered far more than your relative performance to the S&P. Would you rather have the ability to walk or a market beating portfolio? You are and will be okay if you don’t beat the market, keep what matters in perspective.
buy stocks that get more valuable over time
This one is a little different from the prior recommendations, but obviously if you are buying stocks with poor products/services, secular headwinds, or a fragile balance sheet, you will be more likely to trade too much than by owning stocks where you smile when the price goes down.
structure your portfolio for resiliency
Speaking of smiling when the price goes down, even if you own a great stock, at what you thought was a great purchase price, if you buy too much, too quickly, or misalign your portfolio with the needs of your living, when there is a drop you are going to be incredibly prone to poor decisions. Structure your portfolio to your life in a way, so that when the newest market scare/company issue happens, you are mostly indifferent to the anxious forecasting or actual decline of your stock(s).
While circumstances can vary and you must evaluate and take responsibility for your unique financial situation, generally speaking it’s clear that one of the simplest ways to improve most people’s returns is to do more nothing, and less something with your portfolio
Margin of Wisdom