Sometimes inaction speaks louder! – Action Bias
If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring. – George Soros
When the investors are not clear of the situation in the market, they are prone to action bias i.e. they trade even though there is no evidence of returns. The notion that the more you trade, the more returns you get is false because on top of no returns we end up incurring transaction costs.
As Warren Buffet rightly quotes, “We don’t get paid for activity, just for being right” There is a lot of activity in the stock market, most of the times when it is not required. Buffet also used an analogy of a baseball match to drive home his point regarding investing. He says, the lesson for investors is that you don’t have to swing at every pitch. “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”
In the book “The Art of Thinking Clearly” by Rolf Dobelli, he explains that the action bias exists even in the most educated circles. According to the research, if a patient’s illness cannot yet be diagnosed with certainty, and doctors must choose between intervening (i.e. prescribing something) or waiting and seeing, they are prone to taking action.
He further goes on to say that one gets no honor, no medal, no statue with his/her name on it if he/she make exactly the right decision by waiting – for the good of the company, the state, even humanity. On the other hand, if someone demonstrates decisiveness and quick judgment, and the situation improves (though perhaps coincidentally), it’s quite possible that they will get accolades from all around. Society at large still prefers rash action to a sensible wait-and-see strategy.
Watch a 4 minutes video by Rolf Dobelli explaining action bias in life and in stock markets
A rational investor is not carried away by the short term volatility in the market and takes the decision of buying or selling at the right time even if it means inactivity for a fairly long period of time. Successful investment requires the right kind of attitude, patience, reasonably extended periods of investment horizon and ability to insulate oneself from the emotions of the market.
“When there’s nothing clever to do, the mistake lies in trying to be clever….patient opportunism…waiting for bargains…is often your best strategy.” – Howard Marks
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