Have you ever sold a stock only to watch it go up – and up? I certainly have, and I've missed out on some big gains as a result.
On many occasions my best course of action would have been to sit on my hands, but instead I have succumbed to the ‘action bias’, also known as ‘do something syndrome’.
It’s a common mistake for novice and experienced investors alike, with the frequent buying and selling of shares often delivering nothing more than an increased brokerage bill.
The idea that humans like to be active is not new. In 1654, for example, French mathematician Blaise Pascal suggested that ‘all of humanity’s problems stem from man’s inability to sit quietly in a room alone’. That’s probably a stretch, but you only need to glance at the media circus that is modern politics to see that there’s something in what Pascal said.
In 2007 Michael Bar Eli studied 286 penalty kicks faced by elite soccer goalkeepers. He found that the optimal strategy was to stay in the centre of the goal, but goalkeepers almost always dived one way or the other. It just looks and feels better to be doing something, rather than risk the humiliation of standing there flatfooted, while the ball sails past.
But activity does not always mean good results and in some cases can be counterproductive. For good results, we need to pause, think, and ensure that our facts and reasoning are right.
Ventures and Acquisitions
Company executives and boards also fall for the do something syndrome. Acquisitions are an obvious trap, with many chief executives giving in to their overactive animal instinct to take action and buy other companies, rather than risk being picked off themselves.
It’s also easier for a CEO to explain what they are doing, rather than having to explain why they are doing nothing, and acquisitions and other new ventures are obvious focal points for activity.
In the early days of its disastrous Masters venture, Woolworths (ASX: WOW) had a great story to tell. But it’s now painfully clear that it would have been better to stick to its knitting and focus on the threat to its core business from Aldi and a revitalised Coles (owned by Wesfarmers (ASX:WES)). All the activity with Masters ended up having a negative value for shareholders.
BHP Billiton’s (ASX: BHP) $US37bn venture into shale gas was another enormous quantum of activity that has resulted in nothing but huge asset writedowns and losses for shareholders.
In both these situations, shareholders would have been much better off if management had simply done nothing and held on to the capital.
Despite many chief executives falling for the adrenaline rush of The Big Deal, statistically acquisitions fail more times than they succeed – as James Greenhalgh explained last year in Protect yourself from M&A disaster.
Commenting on Berkshire Hathaway’s (NYSE:BRK.A) approach, vice chairman Charlie Munger explains: ‘We’ve got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active’.
In other words, they are willing to wait until the right opportunity comes along.
Time for action
There is of course a time for action, and you don’t want to be watching from the sidelines when a great opportunity presents itself.
To be ready for opportunities requires a lot of patience and discipline. ‘Temperament is more important than IQ,’ explains Munger’s partner and chairman of Berkshire Hathaway, Warren Buffett. ‘You need reasonable intelligence, but you absolutely have to have the right temperament’.
The best opportunities don’t need more than a reasonable level of intelligence to pick out, but you have to have a cool temperament to carry it through. By staying calm, thinking clearly and avoiding action just for the sake of it, you’ll put yourself in the best position to take decisive action where it is warranted.
To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.