“Don’t underestimate the value of doing nothing” Winnie the Pooh

In a modern-day investment firm, the front-office professionals are always at pains to demonstrate how insanely busy they are. The technical term for this given by psychologists is “Conspicuous Industriousness”. They are spurred on by a financial press that supplies a 24/7 stream of “critical news”. Of course this is part of the job for journalists– CNBC anchors need to find something exciting to talk about with their guests. MarketWatch journalists are required to come up with a new headline every few hours. Investors are all too happy to take the bait in their attempt to show they have absorbed and interpreted the new data. If you can show that you traded on that data, it looks even better! But for a serious investor “conspicuous industriousness” can be a dangerous distraction from the real job of generating returns.

The situation often reminds me of a scene from “Wacky Races” featuring Dastardly and Muttley.  I found it unreasonably hilarious as a kid, no matter how many times I watched it. Dastardly is about to fall from a cliff and he calls out to Muttley “Don’t just stand there, Muttley, do something!!” Muttley, standing on the edge of the cliff, ponders this for a moment and then breaks into a dance routine as Dastardly falls to his doom (well, not to his doom because he seems to be up and running again in the next scene)

As the founder of a social network for investors, you might find it strange for me to encourage less activity. But at StockViews, we don’t want to encourage activity for activity’s sake. If you want that, there are plenty of alternative networks, like Twitter or StockTwits. Our community is more concerned with quality over quantity.

Many investors don’t seem to appreciate this point, but two or three great ideas each year are better than a hundred mediocre ones. A million dollars spread over 100 mediocre ideas still generates mediocre returns! This is why we encourage users to make recommendations where they have a high level of conviction.

“You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing”  Warren Buffett

Just because you’re not trading doesn’t mean you’re not working. In fact you should always be working hard to find new opportunities and to evaluate those opportunities against what you already hold. A good investor is like a Swan gliding across the water – all the activity is going on under the water. Although the hard work is not visible to the outside world, the end result is a powerful one. Unfortunately a lot of investors look like a dog thrashing through the water in pursuit of a stick. There is plenty of work apparent on the surface, but little progress. Sell-side analysts are even worse:

“Analysts recommendations may not produce good results. In part this is due to the pressure placed on these analysts to recommend frequently rather than wisely”  Seth Klarman

At large banks, sell-side analysts are usually required to have “waterfront coverage” of an entire sector. This means that they need to maintain coverage of a certain number of stocks – usually between ten and thirty. In order to get their views in front of clients, and to get the clients trading, there is a strong pressure to change their recommendation frequently. The problem with the waterfront model is that the analyst is forced to create stories within the subset of stocks they cover, even if there is no conviction behind it. The real opportunities may be going on elsewhere, but the analyst has no reason to chase them because they don’t fall into their universe.

As an ex-fund manager I was eager to move away from this old (and broken) model. On the StockViews platform, credibility is a function of the result you generate, not the frequency with which you publish. Analysts are not forced to cover one sector, but free to go wherever they see opportunities. This leads to a system where analysts focus on the result they generate, rather than constantly trying to appear ‘busy’. One happy result of this is that we avoid the “information overload” that makes other platforms hard to navigate. When an analyst posts a comment, you know that it is backed by a strong conviction on their part.

With so much pressure for “Conspicuous Industriousness” it can sometimes feel difficult not to “take action”. But a great investor will always be willing to go against the crowd and, if they need to, will do precisely nothing!

“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”  Warren Buffett

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Category

Blog Post

Tags

, , , , , ,