Investors should stick with their investments through market corrections, Brian Belski of BMO Capital Markets wrote on Friday.
"We believe investors who are trying to time entry and exit points in anticipation of a potential market correction are taking the wrong approach," Belski said. "We have always subscribed to the simple notion of sticking with your investment discipline and taking the good with the bad since the hard data suggests it is very difficult to successfully time the market over long periods."
Trying to figure out the sharp moves in the market ends up getting investors in trouble and jumping out of the market when the going gets tough can lead to missed opportunities. Here's Belski and Roccanova:
"We believe most investors have a tendency to sell into the weakness and then wait too long to get back in after the market recovers. And there have been plenty of studies that show the negative consequences of missing just a few good days for investment performance – meaning even the slightest misjudgment could have huge portfolio performance implications."
In fact, based on a chart in Belski and Roccanova's note, returns after corrections like we're experiencing are pretty good, with an average 19.9% growth in the S&P 500 over the following 6 months and 31.4% over the next 12 months.
BMO Capital Markets
Additionally, panic selling can cost you. Bank of America Merrill Lynch's Savita Subramanian found that investors that sold off after a 2% drop and bought back in 20 days later underperform the overall market big time.
A friend of mine is an executive for an organization with global reach. He is intelligent and driven, but constantly distracted. At any given time he will have Twitter, Gmail, Facebook and multiple IM conversations going. The majority of them are useful in some way. Yet, in the back of his mind, he knows there are more important deliverables to get to. But the days slip by and he finds himself working all weekend to catch up. Staying up Sunday night until the early hours of Monday morning has become his modus operandi.
He told me, while checking his Blackberry again, that it results in having no social life. It’s so bad that he tried having his EA pull all of the internet cables on his computer. But there were still too many ways to get online. When he was struggling to complete a particularly big project, his brother took away his Blackberry and left him at a motel with no internet access. Yet, even there, he still found a workaround within 10 minutes using his ancient Nokia phone to check his email. Eventually, after eight weeks of almost solitary confinement, he was able to get the project done.
Why do otherwise intelligent people find it so easy to be distracted from what really matters?
Social media did not create the problem of distraction, but it is clearly an amplifier. Indeed, a study [PDF] by Clifford Nass et al. at Stanford showed that heavy media multitaskers aremore susceptible to interference from irrelevant environmental stimuli than light media multitaskers. Heavy multitasking may encourage even heavier multitasking because it leads to a “reduced ability to filter out interference.” Could the part of our brain that is processing deeper cognitive thought actually be atrophying in the process?
None of this would matter if activity and reward were linearly related. But we live in a world where almost everything is worthless and avery few things are exceptionally valuable. This is a counterintuitive idea. After all, the idea that 50% of results come from 50% effort is appealing. It seems fair. Yet, research across many fields paints a very different picture.
As far back as the 1790s, Vilfredo Pareto observed this nonlinear pattern in Italy, where he found that 80% of the land was owned by 20% of the people. Much later, Joseph Moses Juran, one of the fathers of the quality movement, called the insight the “Pareto Principle” and applied it beyond economics. In The Quality Control Handbook, Juran called it “The Law of the Vital Few.” His observation was that you could massively improve the quality of a product by resolving a tiny fraction of the problems. He found a willing audience in Japan, where the country had been producing low-cost, low-quality goods. By adopting the quality processes, the phrase “Made in Japan” gained a totally new meaning. And gradually, the quality revolution led to Japan’s rise as a global economic power.
Distinguishing the “trivial many” from the “vital few” can be applied to every kind of human endeavor and has been done so persuasively by Richard Koch, author of several books on how to apply the Pareto Principle to everyday life. Indeed, the examples are everywhere.
Think of Sir Isaac Pitman, the inventor of shorthand, who discovered that just 700 words make up two-thirds of our language (further validated by Zipf’s Law).
Think of Nathan Myhrvold, the former Chief Technology Officer for Microsoft, who said (and then confirmed to me in person for this article), “The top software developers are more productive than average software developers not by a factor of 10x or 100x or even 1,000x, but by 10,000x.” It may be an exaggeration, but it still makes the point that effort and results do not share a linear relationship.
Once we unlearn 50/50 logic, a whole set of behaviors become instinctive. We start scanning our environment for what is really essential. We eagerly eliminate the nonessentials. We say no to 1,000 projects in order to say yes to the one that is exactly what we are looking for.
Just think of Warren Buffett’s philosophy, quoted by Mary Buffett and David Clark in The Tao of Warren Buffett, “You only have to do a few things right in your life, so long as you don’t do too many things wrong.” The authors continue, “Warren decided early in his career it would be impossible for him to make hundreds of right investment decisions, so he decided that he would invest only in the business that he was absolutely sure of, and then bet heavily on them. He owes 90% of his wealth to just ten investments. Sometimes what you don’t do is just as important as what you do.”
First, Do This.
To get started, I recommend a simple action list.
1. Before you leave the office today, write down your top six priorities for tomorrow on a Post-it note.
2. Cross off the bottom five.
3. Write down your priority on a Post-it note and put it on your computer.
4. Schedule a 90-minute window to work on your top priority — preferably the first thing of the day.
5. Every time you are about to check email, Facebook, Twitter etc., write down what you are about to do.
The cumulative impact of this small change can be profound. Indeed, I just received an email from an executive about a member of his team who has a particular tendency to want to do everything. Interestingly, this team member is the most productive member on his team. When he was young, he learned to push past his tendency. For a step-by-step guide for applying this to longer term thinking read If You Don’t Design Your Career, Someone Else Will.
Here are two videos. The first is five minutes from a recent interview I did with Stanford University about why it is that otherwise successful people don’t break through to the next level.
The second is a very funny video with “a handy tip” for those of us who are easily distracted.
Most of us just haven’t fully learned how to eliminate the nonessentials.
But we can.
- See more at: http://gregmckeown.com/blog/1-management-mistake/?utm_content=bufferc7ab9&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer#.dpuf
Flickr / Feeling My Age
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