Do nothing.
Huh?
I repeat. Do nothing.
What?
Our whole lives we have been told—and our own experience shows us—that working hard, getting good grades, keeping busy, and pushing forward is almost a sure bet to getting ahead and grabbing the brass ring.
In investing, the opposite is true, which is why it makes it so hard to do. Doing nothing is almost always the surest way to success. As Warren Buffett says, “The Stock Market is designed to transfer money from the active to the patient.”
The best-performing mutual fund in the first decade of the 21st century was the CGM Focus Fund. During ten years covering two recessions, the fund managed to generate an impressive 18% annualized return. What is even more amazing is that the typical investor in the fund actually lost almost 11% annually.
You read that right: an 18% gain for the fund and an 11% loss to the investor.
How is this possible?
Investors were doing exactly the opposite of what they should have been doing; they were buying high and selling low. Investors plowed into the fund when it was high, and when the fund waned a bit, they sold. This is one of the surest ways to go broke.
The CGM Focus Fund’s shareholders are not alone. Several other studies indicate that equity-fund investors underperformed across the board, on average, by more than 6% per year between 1991 and 2010.
Why does this happen? You can blame biology. We are preprogrammed to want to “do something” when we are scared. It made sense tens of thousands of years ago when we had to decide whether a large animal might attack us. Unfortunately, our biology has not kept up with our current survival needs.
Today that fear can come from the media, so-called advisors, friends, family, co-workers, and neighbors. Many unsuccessful investors chase performance, engage in panic selling, and adopt myopic thinking encouraged by watching daily prices.
Successful investors realize that no one can time the market consistently and therefore ignore the fear around them. They know the most important thing is to have a plan, stick to that plan, and when others are selling, do nothing. Warren Buffett said it best: “Investing is simple, but not easy.”
— Paul Rossi