Less is More: How to Invest Better by Doing 1 Less Thing

French philosopher Blaise Pascal once wrote:

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone”

I am pretty sure that Pascal wasn’t talking about investing when he said this. But he might as well be. Investing is not an activity where you are rewarded for the number of actions you take (more on this shortly). From where I stand, you’re more likely to be rewarded when you make the right assessment on a business.

Naughty or nice

In a 2013 study, Brad Barber and Terrance Odean published a study on the behaviour of individual investors. The duo looked at tens of thousands of trades made by investors over a good number of years. After looking through all the data, Barber and Odean made a few conclusions.

Here’s one that caught my eye. It’s about the trading behaviour of investors:

“They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses.”

The good news from the study is that we can be better investors if we simply stopped doing one thing: Trade frequently. And to stop trading frequently, we can stop reacting to financial market prognostications.

Here’s an example. On 11 January this year, an RBS analyst made a bold call to the bank’s clients to sell everything. Essentially, he was suggesting that investors should sell their stocks, because 2016 would be – in his own words – a “cataclysmic year”.

But as 2016 draws to a close, his dire prognostications have turned out to be untrue.

The SPDR STI ETF (SGX:ES3) is up around 4.7% from when he made the call. The SPDR STI ETF is an exchange traded fund that mimics the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI). In the US, the S&P 500 has climbed by 18% over the same period.

Investors who followed the RBS analyst’s prognostications would have lost out on the gains in addition to the trading costs incurred for any transactions.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.