I’ve just finished going back and looking at the trades I made during this last market dip, to see if they worked to my advantage. I thought I was making solid moves for my portfolio, trimming back some companies that looked overvalued to raise cash to buy up companies that looked overly beaten down. But it turns out I was wrong: my portfolio would be up an additional 1/2 percent today had I simply done nothing (and that doesn’t even include commissions, new tax liability, and other frictional costs).
That’s not to say these won’t be solid long-term changes, and none of them were intended to be short-term trades anyway. But still, I’d be better off making those changes today than I was during the dip. It’s just one more reminder that market timing doesn’t work, even when it appears that opportunity is knocking.
All of us want to invest better and want to know what we can do to better maximize our returns. But ultimately, I don’t think successful investing is about maximizing returns so much as it’s about minimizing mistakes. And I’ve come to realize that a big part of minimizing portfolio mistakes is about minimizing decisions.
The simplest investment decision you can make is to just toss all of your money into an index fund. You know that, over the long term, it will do well. Not as well as Saul, of course, but well enough for most folks. Every additional decision we make carries the risk of making an error and letting our human biases creep in. The more decisions, the more risk. This is why trading in and out of stocks doesn’t work: while sometimes we win, overall our mistakes add up to be too many or too severe, and the end result is destruction of either wealth or opportunity or both.
When you look at the best investors, you will usually find that they follow a set of rules and processes. Saul avoids Chinese companies. Buffet avoids tech companies. Those rules aren’t there to maximize profit, but to minimize mistakes. You can say “But Saul, look at all that profit you missed out on with Baidu!” And “Warren, look at all that profit you missed out on with Apple!” And sure, Saul has undoubtedly missed out on tremendous opportunity, and yet his long-term returns are astounding nevertheless. Buffet has missed out on billions – probably trillions – of dollars of opportunity. But he’s still the 3rd richest person in the world, so does it really matter? Missed opportunity is a red herring.
There are, of course, few hard and fast rules in investing. There are a lot of established styles, and most of them are successful for some people. We talk a lot about finding the style that matches your temperament, but what we really are saying is finding a process that will lead you, personally, to make fewer long-term mistakes. We talk about temperament because most of our mistakes are driven by emotion, and so finding a style that helps us work with our emotions, rather than against them, can have a real positive impact over the long run.
Ultimately, I believe we have a tendency to over-complicate investing. As Buffet said, “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
So stop lamenting all the money you could have made – it’s irrelevant – and instead just focus on what you can do to minimize your investing mistakes. What processes do you need to put in place? What rules do you need for yourself to check your emotions? It could be as simple as Buffet’s ticket punch:
I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.
If you had never made an unforced investing error – never chased that hot stock you knew nothing about, never sold out of that great business because it looked overvalued, never lost patience with that misunderstood gem – what might your returns be like today?
We’re all going to make mistakes, of course. I assure you these won’t be my last 
But perhaps, in addition to assessing ourselves honestly from time to time and working on reducing our future mistakes, we should also be thinking about reducing the opportunities for mistakes to be made at all.
Neil