Why Fewer Investment Decisions Could Actually Lead to More Money
Less is more: Sometimes, what you don’t do is just as important as what you do.
Wall Street benefits from trading activity, and that means it needs reasons to make a lot of changes to your investment portfolio. Some investors believe they’ll outperform the market by moving money around from one investment to the other, making hundreds of investment decisions per year. The problem is that all of this activity and decision-making has nothing to do with generating nice returns.
Lessons from baseball: You don’t need to swing that much
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 keep yourself from swinging at bad pitches — what you are looking for is the perfect pitch in your wheelhouse. Warren took the analogy to investing: In investing, you can stand at the plate all day waiting for the right investment opportunities.
“You don’t have to make any decisions,” Buffett once said. “Nothing is forced upon you. They might be wonderful pitches to swing at, but if you don’t know enough, you don’t have to swing.”
With too many decisions, the thinking goes, 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 investing journey, making too many investments has proved costly. At times, friends and I have pressured one another into making an investment decision, either because others benefited from a trade or because a stock was praised on TV. But we hadn’t done the due diligence and research we should have, and we ended up with significant losses. The lesson for us? Be careful, be judicious, and understand that sometimes, the best move is to simply do nothing until you learn more.
What does this mean for your portfolio? It might mean hardly buying or selling stocks for days, weeks, or months. It might mean dollar-cost averaging into your highest-conviction names. It might mean simply logging out of your accounts and enjoying your life, eschewing the urge to trade in and out of positions on a regular basis. Or it might mean jotting down a plan at the beginning of each quarter, and determining a set number of investment decisions you’ll make that quarter. Once you invest in 10 stocks, for example, you might tell yourself that you won’t buy anymore until the next quarter.
Fewer decisions helps combat choice overload
Too many choices can result in feeling overwhelmed, leading to the inability to make a sound decision. But don’t take it from those investing billionaires alone. Steve Jobs famously wore the same black turtleneck and jeans combo every day. Former President Barack Obama wore only gray and blue suits to “pare down decisions,” freeing up his cognitive abilities for the important, high-consequence decisions. “You need to focus your decision-making energy,” Obama said. “You can’t be going through the day distracted by trivia.”
Overchoice, or choice overload, is defined as a cognitive impairment in which people have a difficult time making a decision when faced with many options. It’s never been easier to trade stocks from your cellphone, and there are thousands of stocks from which to choose, flashing on the screen. It’s easy to fall into overchoice and feel you need to make many decisions to make money.
Charlie Munger says a key to his success is “sit on your ass investing,” another way of saying you’re better off buying and holding quality assets, rather than engaging in a lot of buying and selling, trying to anticipate market trends.
The calculus is clear: Cutting down on the number of stocks you buy and reducing the number of times you buy and sell could drive higher returns. Remember, the Motley Fool philosophy is to hold long-term and diversify (25+ stocks) because it helps insulate your portfolio while minimizing risk, especially in uncertain market conditions like the present.
But take it from the best investors: A smaller number of high-quality decisions on those 25+ stocks helps you invest with a clearer mind.