The art of masterly inactive investing: Knowing when to do nothing

“It never was my thinking that made the big money for me. It always was my sitting.” – Jesse Livermore

The greatest investors and traders always highlight the importance of one attribute in their success, one behaviour that separates the greatest, from the merely good. The ability to know when to do nothing – the courage to sit tight.

Always wanting to do something, anything is what gets us into trouble. It’s why buy low, sell high is so difficult to do in practice. Instead, we buy at the peak of the market (afraid that we’ll miss out), and sell at the bottom of the market (afraid that we’ll lose even more).

Knowing when to do nothing is especially important when the market (and you) are governed by emotion, rather than reason. According to Jim Rogers this rule is especially important when you have made money, and now think yourself invincible, “If you stumble upon success in a bull market and decide that you are gifted, stop right there. Investing at that point is dangerous, because you are starting to think like everybody else. Wait until the mob psychology that is influencing you subsides.”

And it is equally important when you have lost money, and are now eager to pump your cash in something (anything!), to recapture what you have lost, “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should sit there until you find something.”

The challenge, as ever is putting this into practice. That’s where masterly inactivity and watchful waiting come in.

In an early episode of the BBC comedy series ‘Yes, Prime Minister‘, Jim Hacker wonders what he ought to be doing for his term in office to be rated a success. Civil servant Sir Humphrey Appleby helpfully suggests “masterly inactivity” as a course of action.

“No,” says Hacker. “A prime minister must be firm.”

“Indeed,” concurs Sir Humphrey. “How about ‘firm masterly inactivity?'”

The origin of the term ‘masterly inactivity’ is way back in the 1860’s. Lord Lawrence, then Governor General of India adopted a strategy of strict non-intervention on Afghanistan. Lawrence recognised that the most effective security for India and his British troops was a light touch approach. Instead, they would wait, watching and only intervene unless it was absolutely essential – if it didn’t sort itself out by leaving it alone.

This strategy (that came to be known as ‘masterly inactivity’) was deeply unpopular back home. Naturally, politicians had to be seen to be doing something to justify the troop presence, and to counter any suggestion that an attack from Afghanistan would be the result of British inaction.

In the same way that politicians always feel the need to tinker (or at least to appear to), it’s natural for all of us to want to do something in areas of life that are important to us. Doing nothing doesn’t feel like its not an option, but it is.

It’s possible to apply masterly inactivity and watchful waiting to all aspects of life. Parenting being one of them (getting out of the way, letting them fight it out but being watchful for danger), another is letting an element of time (but not too long) to pass before seeking medical intervention.

The same strategy can also be useful to employ when it comes to investing. Instead of trying to intervene – constantly tinker and adjusting with your portfolio through every breaking news story and market movement – better to apply masterly inactivity and let it do its own thing, giving it time to grow.

This doesn’t mean set it and forget it. Watchful waiting in the context of investing means identifying milestones along the way (both opportunities for growth, and the threat of catastrophic loss), adopting a process of surveillance that’s systematic. The investor must then gradually, make careful adjustments if the opportunities and threats show themselves to be significantly more or less likely.

Related article: How to be a smarter consumer of financial media

Related article: Information overload

This is post number 4 of a series of 7 articles.

Article number 1 – The Catalyst. Article number 2 – Pay attention to what others neglect. Article number 3 – Attention to detail separates success from failure

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