Christopher Stoakes is a client of HHW and the author of ‘All You Need To Know About The City’, the best-selling guide to the financial markets. The views expressed below are his alone and should not be taken to be shared by HHW. Nor should this blog be taken to be financial advice, which will depend on your particular circumstances. For that, please refer to your usual contact at HHW.
The game of golf is a bit weird. The better you are the fewer shots you get to play. Scant reward if the reason you play the game is because you like hitting the ball. Of course, there is much more to golf than this. Weighing up the effects of wind, terrain, the lie of your ball and so on. And it has the benefit of getting you out in all weathers – despite Mark Twain calling it a good walk spoiled.
Golf’s a bit like investing. The best investors do very little. Warren Buffett says he gets no more than one or two good ideas a year. So that’s all he does. You can be sure, given it’s Buffett, that they are very good ideas. But his point is that great ideas are, by definition, rare. They don’t come along that often and you shouldn’t be acting on anything less.
Terry Smith makes a virtue of ‘doing nothing’. He finds great companies, waits till the shares are at an attractive price, buys – then does absolutely nothing. Nick Train, another skilled stockpicker, runs (amongst other funds) the Finsbury Growth & Income Investment Trust. For four years FGIT bought or sold no shares at all.
It’s fair to conclude from this that the better someone is at investing the less they seem to actually do (of course, in the meantime they are doing their research, pondering, etc.). One reason is that churning (turning over your portfolio, as you would your allotment) is expensive. Buying and selling incurs brokers’ costs, there can be taxes to pay and then there’s the turn (the difference between the buy and sell price). Trading erodes the value of your portfolio as rust does a vintage car.
Besides, the more you trade the more easy-come-easy-go it becomes, encouraging you to make investments you may not really believe in, simply for short-term gain. This is where investment becomes speculation. You become susceptible to the latest tips and market rumour – which is the slippery slope to eventual ruin.
The top investors don’t do any of this. They give themselves time: time to research, to consider, to reflect; time for the proposed investment to fall to an attractive price. They are never in a hurry. One of the best bits of advice I was given is: If it’s a good investment today it will still be a good investment tomorrow. So don’t be in a rush to buy.
The experts avoid market noise. One reason Buffett is based in Omaha is to get as far away from Wall Street as possible. And once you buy you hold. Buffett’s preferred holding period is forever. He took years to build up his stake in Coke, waiting for it to fall to a price at which he was prepared to buy. Dinner guests are often surprised to find Buffett doesn’t know what that day’s market has been doing. He screens it out.
Chris Dillow, economist at Investors Chronicle, is a big fan of tracker funds (as are HHW). ‘Passive funds’ as they are known are low cost, track broad market indices and deliver more consistent and less costly returns than stock pickers running ‘active’ funds. But, Dillow says, they have just one pitfall. People won’t leave them alone. People tinker. They won’t just buy a tracker fund and leave it to get on with its job.
They won’t just plant their allotment and leave it be. They over-water and over-prune. It’s a bit like diesel engines in canal boats. Diesel engines like nothing better than running for hours under load (pushing or pulling something). The biggest reason why engines in leisure boats go wrong is not neglect. It’s over-tinkering by zealous amateurs.
This is why, when it comes to investment, it’s good to have a financial adviser acting as a buffer between you and your portfolio. Then you won’t be able to tinker.
The paradox is that the more interested you may get in the markets and in investing in general, the more you have to restrain yourself from taking unnecessary action. My 96-year old mother is a fine example of how best to do it. She reads the business pages every day and follows the market. She has done so for almost half a century. But she does absolutely nothing. Apart from reinvesting the income whenever there’s been sufficient to do so, she has never done any buying or selling, preferring instead to ride out market turbulence. It turns out she’s done exactly the right thing.
Market timing (getting in and out of the market in expectation of rises and falls) is a mug’s game. Terry Smith makes a point of saying he lacks the skill to do it. He’s being arch. What he means is that only fools try. It’s why the experts say that what matters is time in the market, not market-timing.
So here’s the thing. Don’t follow the markets. Leave it to someone else on your behalf so you’re not tempted to tinker. And if you do feel you’re being sucked in, take up a hobby: buy a canal boat; cultivate an allotment; or even take up golf.
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© Christopher Stoakes Ltd 2017