When it comes to investing, it’s often what you don’t do that matters most. The best example of this is misbehavior.
Unfortunately, not nearly enough investors see it that way. And why should we? We’re bogged down with messages about owning the right investments for today’s environment. Which leads to forecasts and market timing. Two things we’re terrible at, by the way.
Besides, when patience and fortitude are cited as reasons behind investing success, it comes off as too easy…at first. A few decades of experience might challenge that perception.
Investing is a long-term game, that requires long-term patience at the risk of being constantly distracted from that effort. We’re tempted by headlines and market moves to act on a daily basis.
Sometimes the distractions work. We like stories and headlines offer simple explanations — that link cause with effect — for why the market did what it did that day.
It doesn’t matter if the story is wrong. Markets are too complex to pinpoint the sole reason behind a day’s action. Our simple brains prefer the stories because they present an illusion of control over the outcome and often fill in as a scapegoat for why we lost money. That’s better than the alternative. We prefer to believe that outcomes are controllable rather than being at the whim of chance.
And that’s only the beginning. We also prefer to follow crowds, overweight recent events, tend toward overconfidence, confuse luck with skill, and more.
Simply, the natural tendencies humans evolved over the millennia were built for surviving the ancient plains, not the stock market. We’re more suited to focusing on what’s hiding around the next corner. The here and now takes precedence over the far-off future.
Unfortunately, there is always something to worry about (that typically turns out to be nothing) and always something outperforming your portfolio. The instinct in both cases is to act. Protect your money from imminent losses or from missing out on further gains.
Except action comes at a cost. First, it leads to overtrading. It also leads to a repeated pattern of buying high and selling low. Both become a severe drag on performance.
Success in the stock market requires the opposite. Inaction and thinking long-term allow compounding to work its magic. Inaction runs counter to our instincts but it works.
The solution is to find a sound strategy that fits your goals and personality, stick with it, and then constantly remind yourself why you follow it. It also helps to have an irregular reminder that the greatest challenge in this game is ourselves.
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The very best investors are the ones who invest according to their own psyche. You find that their investment styles are consistent with their personalities, their intellects, their approaches to work. It’s not somebody else’s style; it’s their own, and it’s deeply ingrained. — Dean LeBaron
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The chief hazard of a careful common stock program is not that it may bring unexpected losses, but that its profits will turn the investor into a speculator greedy for quicker and bigger gains — and therefore headed for ultimate disaster. — Benjamin Graham
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Humility is an enormously important quality. You can’t win without it. Survival in the end is where the winners are by definition, and survival begins with humility. — Peter Bernstein
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The human animal never behaves as wisely as he means to, particularly when his counselor is Hope or Fear. — Edwin Lefevre
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People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them. — Warren Buffett
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When deciding to sell, people have control over whether to give themselves pleasure or give themselves pain, and they tend to give themselves pleasure. In other words, they tend to sell winners and hang on to losers. It turns out to be a bad idea. — Daniel Kahneman
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The single most important thing, if you want to avoid a lot of stupid errors, is knowing where you’re competent and where you aren’t. Knowing the edge of your own competency. And that’s very hard to do because the human mind naturally tries to make you think you’re way smarter than you are. — Charlie Munger
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Greed is a bandage which a higher power sometimes binds across the eyes of reason. — Edwin Lefevre
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Taking risks today for tomorrow’s reward is both the most challenging and difficult of tasks. Unbridled optimism must be tempered with reality. — Sam Zell
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When investors — individual and institutional alike — engage in far more trading — inevitably with one another — than is necessary for market efficiency and ample liquidity, they become, collectively, their own worst enemies. — John Bogle
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To beat the market is not easy. In addition to a good investment manager, the investor needs perspective, patience, and courage — qualities that do not abound in today’s intensely competitive world. — Robert Kirby
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The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes. — Peter Bernstein
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People, it turns out, are not that averse to risk. For many reasons, they are not opposed to risk, but they are opposed to losing and the possibility of loss plays a very significant part in their decision. — Daniel Kahneman
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Almost everybody on this planet has the brain power to make money in the stock market. The question is whether you have the stomach for it and whether you’re willing to do a little bit of work? Those are the key elements. — Peter Lynch
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Consistency and patience are crucial. Most investors are their own worst enemies. Endurance enables compounding. — Seth Klarman
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The truth is markets are made up of people, with their emotions, insecurities, their tendency to go to extremes, and their other foibles. Thus, they often make mistakes and swing to erroneous extremes. — Howard Marks
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We live in an investment world, populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe. — Warren Buffett
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Confidence is not a very good indicator of accuracy. — Daniel Kahneman
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Good investing requires a weird combination of patience and aggression. And not many people have it. — Charlie Munger
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At the end of every day, I look at my stocks that went up and wish I had more and look at the ones that went down and wish I had less. It’s human nature. — Jean Marie Eveillard
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It makes no sense for individual investors to jump in and out of the market. People who trade in that way rarely die rich, whereas the patient investor often does. — Philip Carret
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It is very hard to think against the crowd, especially when the crowd is practically universal and unanimous in thought and emotion. — Fred Schwed Jr.
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You need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls, it’s a business where you think. — Warren Buffett
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Individual investors tend to churn their accounts, they tend to trade too much, and that they trade too much seems to be due to over-confidence. They believe they know something that they do not know and this is one essential characteristic of human beings, which makes them different from rational beings. — Daniel Kahneman
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Investing isn’t about beating others at the game, it’s about controlling yourself at your own game. — Arnold Van Den Berg
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When people are desperately trying to sell, I buy. When people are desperately trying to buy, I sell. It has worked out very well over the years. — John Templeton
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People who chase growth, who chase highfliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. — Seth Klarman
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Be skeptical of the popular reasoning behind any spectacular move in the stock market — but don’t be too sure this reasoning is wrong. — Benjamin Graham
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The mantra is patience, patience and more patience. Think long-term and remember that the big rewards accrue with compound annual rates of return. — Peter Cundill
This post was originally published on November 19, 2021.
Related Reading:
How to Stop Being Your Own Worst Enemy (in Investing)
Howard Marks: The Human Side of Investing