“What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time.”
~ Jesse Livermore in Reminiscences of a Stock Operator
“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”
~ Warren Buffett
From Warren Buffett’s partner and vice-chairman of Berkshire Hathaway:
Ben Carlson cites Howard Marks on the difference between volatility and risk:
Volatility is the academic’s choice for defining and measuring risk. I think this is the case largely because volatility is quantifiable and thus usable in the calculations and models of modern finance theory.
However, while volatility is quantifiable and machinable – and can also be an indicator or symptom of riskiness and even a specific form of risk – I think it falls short as “the” definition of investment risk. In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility…. What they fear is the possibility of permanent loss.
Read more at A Role Reversal For Stocks and Bonds | Pragmatic Capitalism.
From Miles Udland:
[James O’Shaughnessy of O’Shaughnessy Asset Management] relays one anecdote from an employee who recently joined his firm that really makes your head spin.
O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity….They were the accounts [of] people who forgot they had an account at Fidelity.”
There are numerous studies that explain why this happens. And they almost always come down to the fact that our minds work against us. Due to our behavioural biases, we often find ourselves buying high and selling low.
I have always called this “the Siemens effect” from an example I came across, in a completely different field, about 30 years ago. German electronics giant Siemens built a telecommunications exchange in a sealed container, where no human could have access and all maintenance was conducted from an outside control panel. The exchange experienced only a small fraction of the equipment failures experienced in a normal telecommunications exchange, leading to the conclusion that human intervention by maintenance staff caused most of the faults.
Likewise in investment, if you build the equivalent of a sealed system. Where there is no direct human intervention, you are likely to experience better performance than if there is constant tinkering to “improve” the system.
The caveat is, during an electrical storm it may be advisable to shut the telecommunications exchange down from the control panel. Likewise, with stocks, when macroeconomic and volatility filters warn of elevated risk, the system should move to cash or assets (e.g. government bonds) with low or negative correlation to stocks.
Read more at Fidelity Reviewed Which Accounts Did Best And What They Found Was Hilarious | Business Insider.
Irving Kahn, of investment firm Kahn Brothers, is 108 years old and began his Wall Street career before the crash of 1929. He still works in the investment firm he founded, although nowadays his son manages the firm. Richard Evans asks what advice he would give to investors who go it alone:
Mr Kahn said: “I would recommend that private investors tune out the prevailing views they hear on the radio, television and the internet. They are not helpful. People say ‘buy low, sell high’, but you cannot do this if you are following the herd.
“You must have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets. If you recognise this, you can resist the urge to buy into a rally and sell into a decline. It’s also helpful to remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.”
Read more at 108-year-old investor: 'I doubled my money in 1929 crash – and I'm still winning' – Telegraph.
Rob Booker discusses the importance of focusing on what really works [at 3:30]
You are your own worst enemy.
Those are the six most important words in investing. Shady financial advisors and incompetent CEOs don’t harm your returns a fraction of the amount your own behavior does.
Here are 15 cognitive biases that cause people to do dumb things with their money: 15 Biases That Make You Do Dumb Things With Your Money | Morgan Housel | Motley Fool. Hat tip to Barry Ritholz.
14. Restraint bias
Overestimating your ability to control impulses. Studies show smokers in the process of quitting overestimate their ability to say no to a cigarette when tempted. Investors do the same when thinking about the temptation to do something stupid during market bubbles and busts. Most investors I know consider themselves contrarians who want to buy when there’s blood in the streets. But when the blood arrives, they panic just like everyone else.