Investing is one of the few pursuits where more action does not necessarily produce better results. In fact, being a more active investor, in terms of buying and selling stocks more frequently, can lead to worse results over the long run compared to a buy-and-hold strategy.
For example, buying and selling more often may mean higher commission charges that add up over time. Meanwhile, it may fail to allow portfolio holdings to deliver on their potential because they are replaced by a different stock after a relatively short period of time. And depending on an individual’s own circumstances, it can lead to higher taxes being levied because capital gains are constantly realized.
Thinking time
However, this does not mean investors should spend a minimal amount of time seeking to generate high portfolio returns. Rather, it could mean they should use their time to think about their portfolios, the industries in which they have detailed knowledge and the companies that operate within them. This "thinking time" could be an underrated, but highly important, part of investing because it may help them to fully appreciate the risk-reward opportunities available.
Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Chairman Warren Buffett (Trades, Portfolio) has previously highlighted the importance of dedicating time to think when deciding how to apportion capital.
“I insist on a lot of time being spent, almost every day, to just sit and think," he said. "That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions, than most people in business.”
Greater productivity
As well as being more effective than frequently buying and selling shares, dedicating time to think about portfolio management may be more productive than listening to the views of other investors.
For example, other investors may have different aims when investing their capital. Furthermore, they could have very different time horizons. This could mean that what is the right course of action for them is unlikely to be beneficial to all investors. As such, relying on their views may not represent a worthwhile use of an investor’s time.
A revised schedule
Of course, investors must spend time analyzing stocks and the sectors in which they operate. However, they should also provide themselves with sufficient time to work out how to apply the conclusions they have drawn during their research to their portfolio.
As such, it may be logical to set aside specific times on a weekly or monthly basis to just sit and think. This may sound a rather simplistic suggestion, since most investors would argue that they continually think about how to manage their portfolio. However, with other demands on time, it can be easy to overlook the importance of, and requirement to, think about investments.
Judging by Buffett's performance over the past 55 years, during which time Berkshire Hathaway has generated an annualized return of 20%, more thinking and less action could be a means of allocating capital more efficiently in the long run.
Also check out:
