Actively lazy style helps long-term investors to maintain status quo – by avoiding any fresh buy or sell orders- when markets are volatile.
It may sound counter intuitive but it is true that selective inaction – or even laziness- if resorted to consciously, can in many situations work wonders towards attainment of goals and happiness. Being comfortable with status quo, with environment, and with oneself can drive the flow of creative juices. It helps in reorganizing the thought process, avoid disasters, and results in action later with renewed vigor and enhanced focus. This can be quite a useful trait in field as diverse as sports, warfare and investments. Active laziness ironically turns out to be a highly evolved and practical state of mind especially since it obviates many decision-making points.
Actively lazy style helps long-term investors to maintain status quo – by avoiding any fresh buy or sell orders- when markets are volatile. Many behavioral pitfalls in investing can be circumvented by being in this state since this provides mental fortitude and stoicism to an investor.
Short term fluctuations in markets and stock prices do not affect actively lazy investors. Indeed, such investors do not watch stock prices continuously and instead focus on tracking and understanding company fundamentals. This increases the chances of gaining from mispricing of stocks.
Investors often face a situation where a stock in the portfolio falls by 25-30% for some short-term reason and there is an extreme urge to sell, ostensibly with an intention to buy it again after it has fallen further.
Another example – If a stock zooms by 50% then a high action strategy will call for selling the stock even if it, as per earlier high-conviction analysis, is likely to grow by another 3x. Actively lazy investors are comfortably able to defy such behavioral demons that goad us to pursue the elusive stock bottom or peak. Actively lazy style further suggests that if good stock opportunities are not there, it is better to keep the powder dry and wait rather than buying at any price.
The "Rumble in the Jungle" held in 1974 in Zaire was one of the most eagerly awaited boxing matches in history. In it, pitted against the bone-crunching power of the undefeated reigning champion George Foreman was the timeless agility, stamina and technique of former champion Muhammad Ali. The fight delivered one of the biggest upsets in boxing history as Ali went on to knock out Foreman.
Experts attributed Ali’s win to his makeshift strategy dubbed as "rope-a-dope". Knowing well that he would not be able to match Foreman in strength, Ali repeatedly leaned against the ropes effectively luring Foreman to have a go at him. He mindfully played a patient game doing little but blocking blows to his face and head. In all these rope-a-dope acts Foreman helped himself to a barrage of 20-30 punches over bursts of 15-20 seconds attempting to blast Ali out of the ring but ironically boxed himself out of the fight. Sapped of energy Foreman was eventually knocked out in the eighth round.
Now why do we tend to be in the perennial action mode? A craving for action, urge for control, or the belief that doing more means getting more and looking smarter, are some of the culprits.
Also, if one has not worked hard enough to understand a problem, one may yield to peer pressure, or may follow system 1 (the fast, spur of the moment, and intuitive part) of the brain to be spurred into action even if it is not required. Doing nothing when a stock is on a tear is not easy even if often preferable. Selling too early, getting into a bad investment, high transaction costs, or lack of focus etc are some of the undesirable outcomes of high adrenaline activity in investment management.
In reality less number of decisions means less chances of wrong decisions. Ace investor Warren Buffet goes to the extent of saying that investors should make their investment decisions assuming they will get only twenty opportunities to buy stocks in their lifetime. This need to be selective in action fuels tremendous discipline in the process.
With a lazy (actively, though) style investors are able to steer clear of a stock, or some strategy that is out of their circle of competence, and to avoid unnecessary bravado. Actively lazy bottom-up investors are able to simplify their investment process as they focus on the key drivers of company fundamentals rather than trying to forecast macroeconomic drivers or by taking.
In Indian mythology, Lord Krishna is also known as "Ranchhor" or "one who deserted the battle field". Jarasandh, the powerful king of Magadh, being hell bent on obliterating Krishna and his Yadav clan, once invaded Mathura. Sensing a possibility of complete destruction of the city if there were to be a war, Krishna decided to lead the Yadav's away from the battlefield to faraway Dwarka where they prospered after setting up virtually a new city. Thus, at times instead of grabbing a problem by its horns, a better solution can be found via a less active and even seemingly inglorious route. Put in a different way, one needs to choose one's battles – and stocks.
So, how can one follow actively lazy style in long-term investment? The key is awareness. Investors should reduce external mind-stimulation by cutting off consumption of information with low shelf life. One must read, analyze, and gather evidence to get enough confidence to be lazy when required. Also, it is important to recognise that many developments are random, often with false causality and hence are best ignored.
When Blaise Pascal, the famous French physicist, had said that "All of humanity's problems stem from man’s inability to sit quietly in a room alone" perhaps he had long-term investors in mind.(Vipul Prasad is founder and CEO, Magadh Capital)