“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
- Warren Buffett, CEO Berkshire Hathaway
We don’t believe that success in investing correlates with I.Q. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. Most professionals and academicians like to talk of efficient markets, dynamic hedging, betas, etc. Their interest in such matters is understandable since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising "Take two aspirins"?
A simple investment solution is easy to track and understand, and therefore stick to. This helps take care of one of the big risks in investing — emotions-based decision-making.
“Do not allow the tyranny of compounding costs to overwhelm the magic of compounding returns.”
- John C. Bogle, Vanguard
Time in the market allows you to capture the benefits of the market. And the easiest way to make time your friend is to keep your costs low. Both individuals and institutions are constantly urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.”
- Peter Lynch, Fidelity Investments
Investors should not try to identify the best times to be in the market and when to get out. Not only is the investor required to predict when the market is low enough to buy, but they must also predict when it is high enough to sell. This is an immensely challenging proposition, and there are very few (if any) people capable of making such guesses. Therefore, the optimal behavior is to invest, and then remain invested.
Trying to time the market to catch the highs and lows can lead to missed opportunities for growth when stock markets pick up again. A long term patient mentality avoid such an occurrence, as the need to make predictions is no longer required, and the investor will be exposed to all the upside and downside.
“The hardest part of investing is doing nothing.”
Sustaining a long-term focus at market highs or lows is notoriously difficult. It’s a time when emotions are the wildest when action appears most demanding and the “facts” most compelling. Staying rational in such an emotionally charged environment is extraordinarily difficult. But is also extraordinarily important because the cost of infidelity to your own commitments can be very high.