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Sit-On-Your-Ass Investing

SitA research paper was published in 2005 entitled, “Action bias among elite soccer goalkeepers: The case of penalty kicks”. In it, an analysis of 286 penalty kicks in top leagues and championships worldwide were done. It was found out that during penalty kicks, 1/3 of the time, the penalty taker shoots the ball to the right of the goal, 1/3 of the time to the left and 1/3 of the time to the centre.

It was also revealed in the paper that a goalkeeper picks a side and dives 93.7% of the time and just stands in the middle merely 6.3% of the time. There was a clear bias towards action. With 30% of the kicks right down the middle, the optimal strategy is to obviously stay in the middle. However, by staying rooted in the middle, the goalkeeper might feel he is showing incompetence, thus the need to dive. The propensity to act even though the action may result in something less desired is called “action bias”.

How is this related to investing?

In investing, buying something and holding it for the long-term without trading in and out could help your portfolio. Trading in and out tends to be eroded by commission and, in some countries, taxes.

So, what’s the next best course of action (or inaction, in our case)?

Charlie Munger, in his book, “Poor Charlie’s Almanack”, said that, “If you buy a business just because it’s undervalued, than you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” Charlie called it “Sit-On-Your-Ass Investing”.

As if to back Charlie up, in his 2005 Shareholder’s Letter, Warren Buffett quipped that, “”…Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

To increase returns, we have to decrease our motion (that is, trading in and out of the markets). One way is to invest in businesses, and hold of the long-term. One way to do that is to buy the index exchange-traded fund (ETF) and hold it for the long term.

The STI ETF (SGX: ES3) has produced an annualized returns of around 10% for the past ten years, excluding dividends. By buying and holding the ETF, investors could have received decent returns from the market and at the same time, beat inflation. There are other ETFs listed in Singapore Exchange as well. For an investor who wants to benefit from China’s growth, he can choose to invest in the United SSE 50 China ETF (SGX: JK8). For someone looking to diversify into the Singapore bond market, there’s the ABF Singapore Bond Index Fund (SGX: A35).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.