28 Aug Investing and the fine art of doing less
For an investment manager, Steve Edmundson doesn’t do much. He works 9-to-5 and very rarely works late. While he spends a lot of his working hours reading about investment strategies, he rarely acts on what he reads. ‘I spend a lot of time researching things we ultimately don’t do’ he said.
Don’t be fooled into thinking that Mr. Edmundson is a slacker. In fact, he has a very important job and he is rather good at it. He single-handedly manages the $35 billion pension fund for the Public Employee Retirement System for the state of Nevada across the pond.
Edmundson made the headlines in 2016 when an article in The Wall Street Journal titled ‘What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing’ reported that his portfolio trounced most US pension schemes including the California public pension fund and large university endowment funds such as the famed Harvard endowment fund over 3, 5 and 10-year periods.
What is the ‘secret’ to Mr. Edmundson’s investment success? Doing as little as possible, usually nothing. The portfolio he manages is invested in low-cost index funds and he may make one change a year. When Edmundson became the chief investment officer in 2012, he fired all the 10 external managers to reduce cost and rid the portfolio of complexity. He has no co-workers and rarely takes meetings.
This story demonstrates that there’s an inverse relationship between activity – trading, buying, selling, tinkering – and investment success. It is counter intuitive because in many other domains of life, we associate activity with results. But with investing, the less you do, the better.
As humans, we have a natural tendency to want to act – to do something, anything. The field of behavioral economics calls this ‘activity bias.’ Given the choice of ‘taking action,’ or doing nothing, people want to do something. The choice to ‘take action’ may result in a less-than-optimal decision but we often feel that ‘taking action’ is what we are supposed to do. This is even more pervasive when it comes to investing.
Clients often asks us how they should change their portfolio in light of some topical news or the economic event, such as Brexit, elections, the budget, interest rate movements etc. Often, our answer is to do nothing. Not ‘taking action,’ and not making knee jerk decisions isn’t fun, it is boring, and it is harder than you might think. But it is often the right thing to do. Staying true to your principles and remaining steadfast in the face of adversity takes courage and determination.
Legendary investor Warren Buffett once described his investment process. He noted, “the hallmark of our investment strategy is benign neglect, bordering on sloth.” He is known for saying that his favourite holding period is, ‘forever’.
Many fund managers tend to ignore Mr. Buffett’s advice, regardless of the fact that he is one of the greatest investors alive today! The average manager turned over about four-fifths of his portfolio annually, according to a study by the UK financial regulator.
At Tandem, our investment approach is very similar to Mr. Edmundson. We do the painstaking work and research to ensure that we recommend a portfolio that is aligned with our clients’ goals. And once that is done, we avoid tinkering, unnecessarily. We keep cost and activities to a minimum. We read and research investment strategies, to keep abreast of what is going on in the world but we avoid unnecessary changes to our portfolio. We trust in capital markets to reward our clients over the long term. For us, patience is still the name of the game. The proof is in the returns we have achieved over 3,5 and 10 years.