The Art of Doing Nothing

The best way to win the investing game?

“The big money is not in the buying and the selling but in the waiting”

- Charlie Munger

When reflecting on an investment, we focus on two things:

• The Buy

• The Sell

But what about the long, quiet years of doing nothing? That’s where most of the magic happens, and yet, it’s the part we talk about the least.

After all, how can you reflect on doing nothing?

You bought at $20 in 2006, you sold at $200 in 2022, you bathe in your brilliance and proceed your hunt for the next 10-bagger.

But we’re leaving a lot of insight on the table by doing this.

If 99% of the investment duration was sitting on your hands should we not dive deeper into the period where we so wisely sat?

There is plenty to learn in this under-appreciated aspect of investing.

Today, we dive into the art of what Charlie Munger would call sitting on your ass investing.

Charlie’s idea of buying good things and sitting on your ass was so powerful that it transformed Warren Buffett’s investment philosophy.

It seems, however, that people tend to struggle with the idea of sitting on their ass.

Investors have an action bias - more work must equal more reward.

But investing is a bizarre game, there’s no correlation between input and output.

You may have heard the Fidelity story where insiders said that from 2003 to 2013, the best performing portfolios were those of investors who had died.

As I say, more input doesn’t necessarily correspond with higher output.

If the evidence supports long term investing, just buying good things and sitting on your ass. Why do so little people do it?

American comedian Jerry Seinfield has an answer, check out this short clip.

Thanks to technology, it’s become easy to do something all the time, and it’s never been harder to do nothing.

It isn’t all our fault though, this hyperactivity has been cleverly woven into the system, constant trading is incentivised. If brokers want more money, we must become short term thinkers.

Your broker won’t make any fat trading fees if you’re a boring old long term investor.

Hence we are encouraged, at every moment, to do something.

Resisting this is hard for most people and it shows, average holding periods of stocks are dwindling.

Source: topforeignstocks.com

To me, this isn’t disheartening, this is encouraging; this is how we get an edge.

The easier it is to act, the more valuable not acting becomes.

Whilst discussing the impact of AI on investing, Joel Greenblatt - one of the most successful investors in history - says that long termism might be our only way to win, check out this clip.

Okay, long term wins -everyone says it- we know this by now. But it is a lot easier said than done, otherwise everyone would be doing it,

Consider this scenario, and as you read, think about how you’d behave if it were you.

Let’s say you buy a stock at $4.50, you really believe in the management and the business fundamentals, you intend on owning this one for a long time.

3 years later, it’s trading at 30 cents.

You’re down over 90%. It hurts, everyone is telling you it’s a dud, sell, take your money and salvage it elsewhere.

Then you look at the business. In that time, revenue increased by approximately 140%, and its gross profit grew by over 240%. You hold.

6 years pass and you finally get back to break even.

The year after, it falls to $2.20. You feel an idiot.

You’ve been in it for an entire decade now, and you are down 50%, you are in pain, it hurts seeing that in your portfolio every time you look at it.

You question yourself, everyone else is making money, what if you’re wrong?

Then you take a look at the business, since you bought, revenue increased by approximately 1,395%, and its gross profit grew by over 1,803%. You hold.

6 more years pass, the stock trades at $35.

You won, but now what? Do you sell? Do you hold? How long before it might tumble 50% again? How much growth has it got left?

You sell, you’re done, the ride has worn you out.

Despite being 50% down after 10 years, you’re annual return over the full 16 years was over 13%.

A number that any manager would be happy with.

But 9 years later, the stock trades at $230

You kick yourself, why didn’t you just hold?! Why didn’t you just do nothing?

Because you were so emotionally drained from the volatility, what looked like simply doing nothing was actually 16 years of mental torment, constantly second guessing yourself, and you wanted it over with.

The stock in question was Amazon.

Everyone knew what it was, everyone knew Jeff Bezos was brilliant, but how many people rode it all the way? Not many.

Holding isn’t easy. It’s an emotional roller-coaster, and the seats are reserved for independent thinkers with a relentless and unemotional focus on business fundamentals.

Take a moment to deeply think about the emotional turmoil you experience in doing nothing, the times you missed buying more at 30 cents, the times you were seconds away from selling through fear and embarrassment, the times you didn’t sell it when it was overpriced, the people saying you’re wrong, the market crashes.

Doing nothing is harder than it looks.

---

So, how do we master the art of doing nothing?

It sounds silly to say, but as we know, doing nothing is hard. So let’s talk about a few ways to get better at it.

Volatility and knowing what you own.

A common driver of unnecessary action is volatility, and our tendency to misassociate it with risk.

Markets are made up of individuals, and these individuals have volatile emotions. People let their emotions control their behaviour, and so volatility begins, which ironically creates more volatility.

George Soros made a killing off this idea, and he coined the term Reflexivity to describe it, see my post here for more on reflexivity.

But if you truly understand your investments, volatility is an opportunity.

It’s like Christmas coming early, instead of selling in panic, you’ll welcome it with open arms, just like Peter Lynch did:

Volatility isn’t the enemy, yet it causes people to mistakenly sell all the time (Liberation day is a recent example).

Don’t let volatility stop you on your quest of inaction, because the real risk lies in not knowing what you’re doing.

This idea of risk is something that Buffett & Munger preached religiously.

When asked about volatility and risk, here’s what they had to say:

You have to know what you own, that’s the bottom line. Know it deeply, and you will know how to act in the face of relevant news.

Study your businesses and welcome volatility.

The market is your servant

“The market is there to serve you, not to guide you.”

- Ben graham

If you don’t like the prices that the market is offering you, you don’t have to act on them. Simple.

The market isn’t efficient, it doesn’t give you values, it gives you prices. It’s a tool you can use to buy stock when you think the price is too far detached from value.

That’s all there is to it.

If you believe in a business’s fundamentals, your job is to wait until the market offers a price that suits you, to buy or to sell. If it isn’t at the price you desire, you simply don’t have to act.

The market serves you. You don’t serve it.

Don’t let the price action determine your idea of value, and remember - just because you are quoted daily, does not mean you have to act daily.

Nothings perfect

Don’t be too quick to give up on good businesses or good people.

Working in a small business really amplified this idea for me; sales can be lumpy, one month is excellent, the next not so much.

These wild sales swing are purely seasonality; from outside looking in though, it may look like the business has stumbled. We knew this was not the case because we completely understood the business.

In public markets, a -10% Q/Q sales change is enough to send people running for the hills. In reality it can be nothing to worry about, you just have to understand the nuances of that business.

If you truly understand your business and trust the people you are investing with, you should only care about what Tom Gayner would call being “directionally correct”.

No business is perfect, they will all have bumps in the road. As long as the long term trajectory is improving, don’t be so quick to jump ship.

If you sell on the first sign of bad news, you will never own any business for very long. What matters more is your belief in the management and business to overcome those obstacles. Short term panics can be good buying opportunity’s as those who don’t understand what they own give those who do, a fantastic opportunity.

Down markets tend to put stocks in the hands of their rightful owners, make sure you are a rightful owner.

Think of the opportunities

Sit on your ass investing doesn’t just offer you more money, it offers you something better: time.

If you need an excuse to do nothing, let it be this one.

There are so many wonderful things that we can do with our time outside the world of investing.

It’s wild to me that arguably the most effective approach to creating wealth is the one that literally frees you up to live more life.

By being a sit on your ass investor, you unlock time.

You can read, exercise, learn an instrument, spend time with family, explore the world, whatever you please, even if it’s studying more businesses, you can do it.

This excites me, a lot. I’m someone with too many hobbies and not enough time; the prospect of achieving good returns and still living life to its full potential is something that fills me with joy. I hope it does the same for you.

---

The sit on your ass investing style should not be taken too literally, though. It is not an excuse to forget the business and ignore it for a decade. Things change, landscapes develop, black swan events occur, you have to stay updated on the businesses operations.

Sitting on your ass investing is a philosophy for buying and selling, not an excuse to not keep up with your homework.

There is a brilliant article (for paid subscribers) by The Compounding Tortoise that goes into this, where it is stated the buy and hold strategy is taken too literally - a more necessary term is buy and monitor.

---

We are in a wonderful business

Investing is one of the few fields where you can earn extraordinary rewards not by working more, but by thinking better and waiting longer.

So make sure when you do nothing, you fill that nothing with beautiful things, read, learn, see family, be outside, forget markets exist and enjoy this planet - this is our only life and it’s short.

Looking at stock prices all day is no way to do it justice. The chance of being on this planet is so thin. Lets be sit on your ass investors, and get off your ass individuals - go see the world and let great businesses build you wealth in the background.

Here’s to sitting on our asses (productively).

Sincerely,

The Intellectual Edge