Barry Ritholtz/ The Big Picture
Hello there. It’s deeply ingrained in the human psyche that taking action is a
positive thing. And in many cases it is. But successful investing usually entails the
very opposite — in other words, discipline and self-restraint, feeling comfortable
with doing nothing. Here’s Barry Ritholtz, one of the most popular investment
bloggers in the United States.
I began as a trader and I sat next to a row of guys and one guy was making a lot of
money and the guy next to me wasn’t making money. It kind of perplexed me as a
newbie, how can these two guys, who are more or less…it looks like they are doing the
same thing, you know, moving their stuff around on the screen, buying and selling
that. This guy is really profitable, this guy isn’t. And so, it started me about 20 years
ago researching what was then the nascent field of behavioral economics. Why
peoples psychology works against them, why the way we’re wired, your own
wetware works against you in capital markets. And that gradually, over time I
became less and less active as an investor. My holding periods became longer and
longer and eventually I more or less adopted, I don’t want to say Warren Buffet’s
“my holding period is for ever” but you start thinking about in terms of decades, not
weeks and months.
One of the problems we face as investors is that we’re constantly surrounded by “noise”. For
example, we see and hear stories on radio and television about markets falling or
rising sharply, and we’re tempted to act on impulse. And the newspapers are full of
ideas about the latest investment opportunities. Almost invariably though, the best
course of action for those with the right investment strategy in place, is inaction.
The biggest enemy of an investor is themselves. There are a number of studies that
look at investor performance. Not versus a bench mark but versus their own
holdings. And most investors under perform their own holdings. Now why is that?
Well, some guys shows up on TV, his fund is up strong that year, he looks the part,
he sounds good, so investors all pile into that. And what happens at that point: The
mean reversion begins and after that hot streak comes to an end that fund either
goes back to normal returns or worse, it makes up for that strong period. So what
did they do? They sell out of the bottom. The ideal time to buy is not when
something has had a huge run up and the guys on the cover of a mutual fund
magazine, it’s because I want exposure to this asset class and this is the least
expensive and most efficient way to get that exposure.
Thank you to Barry Ritholtz for that insight, and to you for watching. Goodbye.