I read something quite interesting the other day. Fidelity has done a study recently to measure which of their holders got the most return. They segregated the return performance of their accounts based on time line. You are not going to believe this. The best performing accounts were of those clients who were dead! Second best returns were achieved by those who had forgotten that they even had an account! Isn’t that just astounding?
It reveals, more than anything else, the effect of the long term on the amount of returns that you can generate. The catch however, is that you need to be dead to get the best returns from the long term!! Just kidding. Those that came in with the second best returns probably subscribed to that old Hero Honda jingle, “Fill it, shut it, forget it”. Hey, maybe Raamdeo Agrawal coined that one for Hero Honda, don’t you think? It fits his philosophy and should therefore be applicable to his favorite stock as well right? But seriously, this test is the example of the power of compounding. But we all know that story right?
Unfortunately no one can quite forget it nor is playing dead the ability of most people. Given that we all have this insatiable need to be active- as though it is demanded of us- it stands to reason that returns will actually diminish, commensurate with the level of the activity that you undertake! In this age of instant news and instant analysis delivered to you 24 hours a day, can you really forget it or try playing dead on your investments? Obviously not. So if any action that you are going to take is likely to reduce the returns (as per the Fidelity findings), then day traders, who have the most amount of activity, should fare the worst! This is anyway the common perception and it is not far from the truth either. But the real reason is not just activity but owing to more of misguided activity, unplanned activity, emotionally charged activity and finally, activity for the sake of activity!
How does one then strike a balance between activity (which is, after all, a sign of life!!) and playing dead? The one recourse I know is to have a method that will channelize the activity in a proper direction. The unbanked river, when in spate, flows wildly, destroying everything in its path. But when banks have been cut into it, the flow is smooth and controlled. A good method is like building banks on your emotions which run like a wild river. A good method is like a beacon from the lighthouse. A good method is the air cover for your ground forces in a war.
Everyone has heard of methods, perhaps even tried one or two. But who has done so consistently? Traders are forever in search of the ‘new’ method that will give them the riches without any effort! That’s a chimera. Good traders are those that have internalized a method and have developed the mental fortitude to work them. Over time, this makes them seem intuitive. There is really no such thing as an intuitive trader. It is just result of hard work, personal commitment and the proper mental framework to remain on that path. But what most people see is the surface evidence- where none of the attributes just mentioned are visible, thus giving rise to a feeling that none of those are required. In my personal mentoring programs, I stress very highly on getting the mindset right than any other. But only those who gather the importance of the psychological process make it as traders and the rest continue to be where they were despite the training. Many are unwilling to bring forth that commitment to change and hence remain locked in their old habits. This leads to the same (unsatisfactory) results.
The route to the best returns from the markets lies within us. Seek it there.