Less is more: Sometimes what you don’t do is just as important as what you do.
Wall Street profits from trading, and that means you need reasons to make a lot of changes to your investment portfolio. Some investors believe that they will outperform the market by moving money from one investment to another, making hundreds of investment decisions per year. The problem is that all this activity and decision making has nothing to do with generating good returns.
Baseball Lessons: You Don’t Need to Swing That Many
Warren Buffett took an important ingredient for his investment strategy from Baseball Hall of Famer Ted Williams, who wrote The science of hitting. Williams argues that to become a great hitter you have to avoid hitting bad pitches; what is sought is the perfect launch in the wheelhouse. Warren took the investment analogy: In investing, he can be at the plate all day waiting for the right investment opportunities.
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“You don’t have to make any decisions,” Buffett once said. “You’re not forced to do anything. They can be wonderful pitches to swing at, but if you don’t know enough, you don’t have to.”
With too many decisions, it is thought, you end up being a juggler with too many balls in the air. You don’t just drop one, you end up dropping them all.
In my own investment journey, making too many investments has been costly. On occasion, my friends and I have pressured each other to make an investment decision, either because others benefited from a trade or because a stock was praised on television. But we hadn’t done the due diligence and research that we should have done, and we ended up with significant losses. The lesson for us? Be careful, be judicious, and understand that sometimes it’s best to just do nothing until you learn more.
What does this mean for your portfolio? It could mean barely buying or selling stocks for days, weeks, or months. It could mean dollar cost averaging on your highest conviction names. It could mean simply logging out of your accounts and enjoying your life, avoiding the need to change positions on a regular basis. Or it might mean writing down a plan at the beginning of each quarter and determining a set number of investment decisions to make that quarter. Once you invest in 10 stocks, for example, you can tell yourself that you won’t buy any more until the next quarter.
Fewer decisions help combat option overload
Too many options can make you feel overwhelmed, leading to the inability to make an informed decision. But don’t just take it from billionaires who invest. Steve Jobs wore the same combination of turtleneck and black jeans every day. Former President Barack Obama only wore gray and blue suits to “reduce decisions,” freeing up his cognitive abilities for big, high-impact decisions. “You have to focus your energy on making decisions,” Obama said. “You can’t spend the day distracted by trivia.”
Option overload, or option overload, is defined as a cognitive impairment in which people have difficulty making a decision when faced with many options. Trading stocks from your cell phone has never been easier, and there are thousands of stocks to choose from, flashing on your screen. It’s easy to over-choice and feel like you need to make a lot of decisions to make money.
Charlie Munger says the key to his success is to “sit down investing,” another way of saying that it’s better to buy and hold quality assets, rather than engage in lots of buying and selling, trying to anticipate market trends.
The calculation is clear: reducing the number of shares you buy and reducing the number of times you buy and sell could lead to higher returns. Remember, Motley Fool’s philosophy is to hold long and diversify (25+ stocks) because it helps isolate your portfolio while minimizing risk, especially in uncertain market conditions like the current ones.
But take it from the best investors: Fewer high-quality decisions on those 25+ stocks help you trade with a clearer mind.
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