In a world addicted to social media, our need to stimulate ourselves frequently has reduced our attention spans. It turns out, as per this piece that we are naturally wired to seek stimulus than sit still. The article talks about this inherent human need for activity in the context of investing and how it can hurt us. The author cites a 2014 research study by social psychologist Timothy Wilson which put the subjects through a ‘thinking session’ for 6-15min with a choice to sit alone with their thoughts or hurt themselves via electric shock. The results were remarkable in that many participants chose to receive shocks i.e, negative stimulation over no stimulation.
Why would we do that to ourselves?
“Wilson first hypothesized that time alone with one’s thoughts led to periods of negative self-reflection. Yet, previous studies rebuked that claim. Another thesis is that people hate being both the “script-writer” and “experiencer” of thoughts. In other words, without external stimuli, humans do two things:
- “Write” an alternative reality in their minds.
- Experience that written alternative reality in their minds
Even when controlling for these written experiences, the researchers found no improvement in enjoyment. It’s no wonder people spend hours meditating to control their minds and have peace within boredom. Failure to do so could lead to physical harm. Wilson ends the paper with an exasperated conclusion (emphasis mine): “Without such training, people prefer doing to thinking, even if what they are doing is so unpleasant that they would normally pay to avoid it. The untutored mind does not like to be alone with itself.””
He then corelates this natural human trait to how we choose to hurt ourselves in investing by choosing action over inaction. He quotes Ed Seykota:
“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.”
And shows how this quote summarises Wilson’s experiment in the investing context: “Before learning about Wilson’s experiment, Seykota’s quote makes little sense. But think about it. Replace “market” with Wilson’s “thinking sessions” and replace “lose” with “hurt.””
He highlights some ways in which we inflict pain on ourselves in the markets:
- Selling a stock after a drawdown on no fundamental news
- Focusing only on valuation metrics
- Averaging down on losers
- Poor position sizing
- Overemphasis on quarterly results
- “Resulting” past performance/decisions
- Assume infallibility
He then quotes the rare few investors who have demonstrated the ability to ‘sit tight’:
“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
“I think the record shows the advantage of a peculiar mindset – not seeking action for its own sake, but instead combining extreme patience with extreme decisiveness.” – Charlie Munger
“The single most important skill for being a good investor is to be very content with not doing anything for extended periods, and that’s perfectly fine.” – Mohnish Pabrai
“Any superiority an investment process may have will only emerge with time, so patience is important.” – Nicholas Sleep
Finally he gives three rules which investors can follow to avoid the pain of inaction:
“Rule 1: Set The Highest Bar Possible For New Ideas
A high bar makes it almost impossible to add another stock to the book because the ones they have are better. When faced with a decision to buy a new company or buy what they own — they buy more of what they own.
…The higher your frequency of “great” ideas, the lower your portfolio hurdle and boredom. Even if you have a global mandate and can fish anywhere, always raise the hurdle rate to reduce the amount of “great” ideas you find. They should be few and far between.
Rule 2: Preoccupy Yourself With Other Work & Nix Boredom In The Bud
Second, unnaturals preoccupy themselves with other work like reading and learning about companies. This second step only works if you do the first one. A low bar for portfolio entry reduces your ability to deeply study new businesses and ideas because you’re mesmerized by the latest shiny object.
A high hurdle allows you to read hundreds of annual reports, investor presentations, and earnings transcripts without feeling like you need to add the idea to your portfolio. Moreover, the deeper you understand a business, the more you realize you don’t need to buy the stock right then and there, which brings us to our third characteristic of “unnatural” investors.
Rule 3: Bet Only On The Highest Asymmetric Opportunities Available
My biggest struggle is the feeling I’ll miss out on a stock’s returns if I don’t buy “today.” The best investors don’t share this struggle. The “unnaturals” know that it doesn’t matter if an idea is genuinely great if they purchase today or tomorrow.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
