Warren Buffett once remarked that successful investing consists of long periods of inactivity, bordering on sloth. That pretty much describes my attitude towards investing coming into the new year. If we are going to have more of the October massacre, then we should at least seek cover and conserve cash.
The losses from Citigroup and Bank of America were staggering and confirmed that the worst of the financial mess is far from over. Analysing when the good days will arrive seem to be a futile exercise now. In any case, I am less worried about the economic recovery which will definitely happen with so much money being dumped into the system.
My concern is whether we can have effective supervision and regulation to prevent a recurring bust, once euphoria and greed return? If not, we are only delaying the inevitable financial Armageddon which even the printing press of the US government may be powerless to handle.
Of course, returning to the gold system will impose strict discipline on all nations and individuals but in terms of trade and development, it is not ideal. The gold reserves held by the US has declined over the years; in fact, the ever bulging US current account deficit could even wipe it out in one fell stroke. Exporting nations will suffer if US has no gold to pay for imports nor credit to fall back on… I can just see the global economy growing at a snail’s pace.
In another day or so, the Bush era will be over and the Obama administration is poised to hit the ground running. Will they be able to instill discipline while not stifling the global economy? Obama has promised to spend trillions to create jobs. That is good, there is much to be done, in terms of infrastructure and development of clean technology.
As for bailouts, common sense dictates that Obama should let irresponsible and ailing financial institutions fail but the Law of Unintended Consequence may give him an unpleasant domino effect with mass bank runs and businesses to fold in unison.
Tough decision indeed, and to be fair, being an armchair critic is easy, sitting on the hot seat is another matter altogether. If decisions can be made so easily, just let all the laggards fail and you are guaranteed sky-high approval ratings, then why isn’t anybody doing it earlier?
With all the uncertainties, I have decided to be a sloth investor in the next few months. Laziness in investment can be a virtue but not in your workplace. If you don’t step up on productivity during this economic recession and rather be a sloth, it is a quick one way ticket to unemployment.
One of the first step to be a strategic sloth investor is to pick businesses that required very little attention on our part, and if it can beat the market, all the better. The idea is to concentrate on solid, reliable business leaders which don’t require daily monitoring of their stock prices.
If the stock market closes for the next five years, they will be the businesses which will still turn in superior performance and not give us sleepless nights. By the way, here are 3 more tips for the sloth investor:
1. Don’t overdiversify.
How many stocks do you own? Picking a valuable stock takes time, not only the initial due diligence work but also subsequent monitoring. Just imagine the work involved for 20-30 stocks in our portfolio? Warren Buffett had his famous 20-ideas punch card, for the simple reason that there are only few great investment opportunities around.
Basically, investors will punch a slot in the card for every investment they made. This forces people to give more thought to their investments and thus make better decisions. Another bit of wisdom in Buffett’s punch card is that remarkably few decisions are needed to achieve remarkable results.
Throughout his career, Warren Buffett notched great returns from a few smart decisions. He doesn’t respond to all investment pitches, preferring to wait patiently for the right opportunity. If the most successful investor of our time spend his quality time playing bridge, why work ourselves silly by getting involved with too many businesses?
2. Management Must Have Integrity And Honesty.
I appreciate honest companies that explains things clearly and briefly. If the management cannot explain their business decisions/prospects to us in simple English language, we should not waste our time or money on them. Terms like “creating knowledge-based value in emerging markets” can befudge even the seasoned investors so if you can’t even figure out what the company is doing or where it gets its revenue, take your money and run away fast.
3. Forget Technical Charts.
I do not follow technical trends or day trade for a living. I believe there is always somebody out there who’s smarter, sleazier or have more crucial information than me, so it is a skewed playing field. The people with big money and connections can move market with their volume and usually get the better end of a trade, not retail investors. Riding on their tailcoats may be profitable but I will rather enjoy a breath of fresh air outside rather than monitoring the screen every minute.
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