Professor, investor, and researcher Roger Ibbotson made an excellent point about investing in stocks in a recent sit-down with Barry for MIB:
As a portfolio manager, you could do nothing and you might do fine. You don’t have to literally trade every day to make things work. You only want to trade when you really do have the edge that you’re actually going to add value.
I’ve managed companies and I’ve managed stocks. Stocks, in some way, manage themselves. But people don’t manage themselves. It’s much harder to manage people than it is to manage stocks.
Unless you’re an activist investor a la Bill Ackman, everyone investing in publicly traded stocks is a more or less a passive owner because you have no say or control in what the underlying company or companies are doing.
It doesn’t matter if you self-identify as an active or passive investor, the stocks don’t care about you either way. It’s a completely one-sided relationship.
Adam Smith explained this idea beautifully in his classic book The Money Game:
The most important thing to realize is simplistic: The stock doesn’t know you own it. All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of these things are unreciprocated by the stock or the group of stocks, You can be in love if you want to, but that piece of paper doesn’t love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.
We’ve all experienced or known someone else who has experienced the friend zone when trying to pursue a relationship that has no chance of ever getting off the ground. That’s how your relationship with the stock market works except its so cold-hearted you never even reach friend status. It just completely ignores you from the get go.
When Ibbotson said it’s “much harder to manage people than it is to manage stocks” he was speaking in terms of running a business but the hardest person to manage is yourself when we’re talking about investing.
Research shows investors who are overconfident in their abilities and assume they’re above average investors trade more frequently. There’s an embedded illusion of control in that we assume doing more will lead to a better result. Of course, the research also shows that those investors who trade more end up with below average results.
We’re all taught at an early age that working harder and giving it 110% will lead to better results. This is true in some endeavors but rarely when it comes to the markets. Trying harder typically leads to worse results because when you press you tend to make mistakes.
There are no extra points awarded for effort or degree of difficulty when investing.
As Charley Ellis once said, “Investing is not entertainment — it’s a responsibility — and investing is not supposed to be fun or “interesting.” It’s a continuous process, like refining petroleum or manufacturing cookies, chemicals, or integrated circuits. If anything in the process is “interesting,” it’s almost surely wrong. That’s why benign neglect is, for most investors, the secret of long-term success.”
If the stocks more or less manage themselves, that means it’s up to the investor to manage themselves.
Managing people is more important than managing stocks when it comes to investing.
9 Underrated Investing Books
Now here’s what I’ve been reading lately: