“All our misfortune arises from our inability to remain quietly in one room.”
Pascal wasn’t talking about the investment world, of course, but he may as well have been. The need to do something, whether the thing needs to be done or not, seems to be part of the human condition. If Tribe A attacks Tribe B, Tribe B could decide to do nothing, simply to sit quietly in one room (ok, hut). But, probably, Tribe B is going to feel compelled to do something, namely, to attack Tribe A. Result: war, catastrophe, doom all around.
An investor contemplating his portfolio could decide to do nothing, simply to remain quietly in his room (reading Pascal, let’s say). But that’s not what most of us do. Most of us feel compelled to Do Something, Dammit. We read the Wall Street Journal, we watch Cramer, we subscribe to newsletters, we read boring investment blogs.
But we don’t stop there: we obsess about our portfolios. We monitor our managers monthly (if not weekly or daily). We insist on meeting with our advisors to review our portfolios at least quarterly, and we’re deeply disappointed if the advisor doesn’t suggest at least a handful of Crucially Important changes in the portfolio. Advisors are happy to respond, solemnly recommending this and that change in strategies, tactics, managers, whatever.
And what does this restlessness, this urgent need to Do Something, add to our investment results? Nothing! Study after study shows that the overwhelming number of manager terminations are mistaken, in the simple sense that the terminated manager outperforms the engaged manager over the next market cycle. Study after study demonstrates the near impossibility of making market timing work. Study after study bears witness to the danger of departing from our long-term strategies. Yet we persist in our need to Do Something.
I have a friend – we’ll call him “Joe,” since that’s his name. Many years ago Joe began buying stocks. He’d be the first to tell you that he knows precisely nothing about security analysis. He bought the stocks because he thought well of the companies, figured that since they had good reputations they probably knew what they were doing. A rank amateur!
In those days online trading hadn’t been invented, so Joe had to use a “full service broker” (there’s a euphemism for you). The broker would buy the stocks – after all, he was getting a nice commission – but then he would pester Joe endlessly about the importance of buying whatever the Product of the Day was at Merrill (or maybe it was Dean Witter or E. F. Hutton). Joe was endlessly entertained by these calls, but he never – never – fell for the pitch.
On top of this (obviously foolish) strategy, Joe never sold anything! Periodically, Joe’s broker would call in a total panic: Joe needed to sell Consolidated Widgets now! The company was going down! Joe never sold.
It’s absolutely true that some of the companies Joe bought – I recall TWA, for example – did in fact go bankrupt. It’s also true that Peyton Manning sometimes throws an interception. The point is that Joe’s investment results over the last thirty or forty years rank him right up there with Warren Buffett. He’s had few transaction costs, he’s paid no fees, he’s incurred precious few taxes. Joe is the Poster Boy for the wisdom of remaining quietly in one room. (Actually, Joe has a passel of kids, so it’s probably not that quiet.)
So your humble blogger is hereby recommending a policy of “benign neglect” with regard to portfolio management, even though I’m likely to be as excoriated for it as was poor Pat Moynihan.(1) In my next post I’ll consider what such a policy might look like.
(1) For the benefit of my younger readers, Daniel Patrick Moynihan was a long-serving US Senator from New York who had a profound influence on American social policy, including the War on Poverty. In 1969, Moynihan advocated (to President Nixon) a policy of “benign neglect” with respect to race in America. Moynihan was crucified by the left, which viewed the idea as regressive and even racist. In fact, Moynihan was simply alarmed by the incendiary, race-baiting rhetoric emanating, on the one hand, from members of groups like the Black Panthers, and, on the other, from politicians like Spiro Agnew. I met Moynihan several times and always assumed he was a patrician born and bred (probably because he talked like William Buckley). In fact, he was a poor kid who graduated from high school in East Harlem and lived in Hell’s Kitchen.
Next up: What to Do When There’s Nothing to Do (Part 2)
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.