Most of what we end up doing in our lives is determined not by what we decide to do, but by what we decide NOT to do. In the course of any given day we decide not to do millions of things. Eliminating all of these actions results in a direction that determines how we end up acting out our day. For instance, at lunch you might think you’re choosing to eat a baloney sandwich. But you didn’t really choose to eat the baloney sandwich. You decided not to eat hamburger, a filafel, a Trump Taco Bowl, etc.
There is, presumably, a lot of logic behind most of these decisions.¹ Most of us follow some sort of system to simplify this whole process. We follow a routine which makes this process virtually automatic. For instance, I usually don’t eat because I enjoy food. I eat because I want to live. So, any time I walk into a restaurant I know what I am eating 99% of the time. I will order a chicken sandwich if it’s available. Boring? Hell yes. Efficient? Big league. The main reason this decision is efficient is because I’ve determined my goal (I want to live), determined my strategy for achieving that goal (eat food), determined what is the easiest and healthiest option that I won’t projectile vomit (chicken sando). This process was established not by deciding that I love chicken sandwiches (I like lobster rolls much more, for instance), but because I simplified the process of determining all the things I won’t do. It’s a rigorous empirical approach to getting this simple task done.
In the investing world we struggle with the urge to be active and to always be doing something. But smart investing is mostly the art of doing nothing. It’s knowing why you shouldn’t act on your urges. We aren’t picking the things we want to own. We’re understanding why we shouldn’t be buying/selling most of the time. Do you think Warren Buffett got rich investing in every deal that came across his desk? No, Warren Buffett got rich doing nothing with 99% of the deals that came across his desk.
Personally, I use macro to build a foundation for the investment process. This means I’ve developed a systematic model for asset allocation that is based on rigorous empirics that describe the financial world for what it is and I apply those understandings to personal situations. But most of my work as a portfolio manager is understanding why I shouldn’t do anything. I write this website almost exclusively because it’s part of my process of understanding the world around me so I can reject acting on most of the world events around us. For me, reading and writing about silly things like Brexit or Donald Trump is a behavioral tool for understanding the world around me so I can become comfortable with the likelihood that these big macro events shouldn’t steer me off course.
The thing that makes investing so difficult is that it’s analogous to ordering a chicken sandwich in a restaurant while hundreds of sales people are coming up to you explaining why their sandwich is going to protect you against inflation, market crashes, etc. Meanwhile, TVs are blaring in the background explaining how sandwiches are on the verge of imminent disaster….We are constantly barraged with news and events that trigger that urge to act. And 99% of the time you should say no to these sales people and just order your plain old chicken sandwich.²
Of course, investing requires some activity. There truly is no purely passive portfolio. But the difference between the good active investors and the bad active investors is that the good active investors know that smart investing is mostly the art of doing nothing. And they’ve developed a systematic model based on their understandings of the world to help guide them through the art of doing nothing.
¹ – This argument cannot be made for the majority of the 47% of Americans who decided not to vote on Tuesday.
² – To be fair, I have found that this is not always easy. My wife has much more cultured tastes than I do and insists on diversifying her tastes at times. This results in meal picking deferment for me. In short, I become a slave to my authoritarian food ordering master and I simply eat what is put in front of me. Since I mostly eat to survive I find this arrangement helps in many ways as it not only nourishes me, but keeps my wife happy and avoids the scenario of her wanting to end my existence.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.