The Actively Lazy Style; Of Life, and Of Investments

penalty_kick_shot_ronaldo

Blaise Pascal, the famous French physicist of the 17th century, had once said “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”

Understandably it is not easy to extol the virtues of laziness, or even of selective inaction. However, if laziness is resorted to consciously, with full control over oneself, in many situations it can work wonders towards attainment of goals and achievement of happiness. It can be of immense value for people in fields as wide ranging as sports, investments, science, archaeology , human relations, medicine and business management. Being comfortable with status quo, with environment, and with oneself can at times be crucial for flow of creative juices, for revitalization of thought process, for avoiding disasters, and for action later with renewed vigor and enhanced focus.

Why float like a butterfly; Just rope- a- dope, and sting like a bee

In one of the most eagerly awaited boxing matches in history – the “Rumble in the Jungle” in 1974 in Zaire, the bone-crunching power of the undefeated reigning champion George Foreman was pitted against the timeless agility, stamina and technique of former champion Muhammad Ali. The fight delivered one of the biggest upsets in boxing history as Ali went on to knock out Foreman. Ali’s win was attributed mainly to his makeshift strategy dubbed as “rope-a-dope”.

Ali was a nimble fighter with great footwork and stamina, and had a knack of scoring points with his lightning fast punches and jabs. However he realized early in this fight that his famed ability to “float like a butterfly, and sting like a bee” would come a cropper due to Foreman’s diagonal movements blocking his “floating space”. Ali instead came up with an improvised strategy –to lean against the ropes effectively luring Foreman to have a go at him. In all these rope-a-dope acts Foreman helped himself to a barrage of 20-30 punches over bursts of 15-20 seconds attempting to blast Ali out of the ring.

Spectators thought after seeing the first such instance that Ali was finished and it was a matter of minutes if not seconds before he was floored. However Ali was mindfully playing a patient game – deciding to do nothing except for closing the access to his face and head, thus avoiding any meaningful damage and inviting Foreman for the elusive kill. In doing so Foreman boxed himself out of the fight – he was sapped of energy and eventually knocked out in the eighth round.

The ant behavior on our part

So why are we unable to sit quietly without disturbing our limbs or vocal chords? Craving for action or to be seen doing something, bubbling energy, attempt to be in control, and the perception that doing more means getting more and that one will look smarter by doing so often push people towards perennial action mode. In many professions, we are expected to have an opinion on everything and cannot be seen as saying “I don’t know”.

Lack of skin in the game can transform into incentive-caused bias

There are instances where there is a misalignment of interests and outcome for the actor is different from outcome for the person experiencing the end results. Such incentive caused bias is often seen in investment management industry if fund manager’s compensation has low correlation with the investor’s portfolio returns.

Feedback loops not closed

In a situation where we have not done enough work to understand a problem, it is quite likely that we may yield to peer pressure, or may follow system 1 (the fast, associative, spur of the moment, intuitive and emotional part) of the brain to be spurred into action even if it’s not required.

Actively lazy in investments and life

Doing nothing – when market has leapt, or it has tanked, or a favorite stock in the portfolio has collapsed, or a stock has jumped quite fast though is still at less than price objective – is not easy even if often preferable. Selling too early, getting into a bad investment, excess portfolio concentration, high cost of doing business are some of the undesirable outcomes of high adrenaline activity in the field of investments.

Less number of decisions means less chances of wrong decisions This sounds counter-intuitive but the amount of discipline this can instill in an investor, and hence the benefit it can have for the portfolio, is amazing. Ace investor Warren Buffet goes to the extent of saying that investors should assume that they have only 20 stocks to buy during their life time and make their investment decisions accordingly.

Don’t try to jump over seven-foot bars; Look for one-foot bars that can be stepped over – With a lazy (actively, though) style an investor is able to steer clear of a stock, or some strategy that is out of her circle of competence. Actively lazy investors are comfortably able to avoid unnecessary bravado and temptation to stray into unchartered territories.

In Indian mythology Lord Krishna is also known as “Ranchhor” or “one who deserted the battle field”. Jarasandh, the powerful but evil king of Magadh, being hell bent on obliterating Krishna and his Yadav clan had once invaded Mathura. Mindful of the possibility of certain destruction of the city if there were to be a war, Krishna decided to lead the Yadav’s away from the battlefield to the faraway Dwarka where eventually the erstwhile dwellers of Mathura prospered after setting up virtually a new city. Thus, there are some situations where instead of grabbing a problem by its horns, a better solution can be found via a less active and seemingly even an inglorious route – possibly aided by an outside view, or by inversion. Or better still, not every battle in life is worth fighting.

Busy-bee investing is injurious to wealth – As investors we may face a situation where a stock we hold has fallen by 20-30% for some reason and there is an extreme urge to sell. Very often the reason for this decline is temporary in nature with low long-run relevance. Here, while the analysis should obviously be thorough it is important to be actively lazy in responding to the behavioral demons (that make us hyperactive and induce us to go for the elusive stock bottom).

Pulling out the flowers? – If a stock spurts by 50% then a high adrenaline strategy will call for selling the stock even if it, as per earlier high-conviction analysis, is set to grow by another 5x. This mistake is committed repeatedly due to investor’s inability to take a break from watching the stock prices continuously.

Stop chasing stocks; instead, buy when market offers them – If good stock buying opportunities are not there it is better to keep the powder dry and wait for opportunities to emerge rather than buying at any price.

The world would have been a very different (in fact, much worse) place had Adolf Hitler stuck to his original plan of pummeling all the western European powers into full submission before invading the Soviet Union.

WWII had been going very well for Germany in mid-1941. Entire continental western Europe was under its occupation. Britain, with its geographical advantage of being an island, had unleashed fierce resistance but it seemed like a matter of time before it would be down on its knees. USSR would not intervene as it was overawed by Germany’s might and also due to its non- aggression pact with Germany, and USA was largely out of the picture.

Amid a stalemate with Britain, Hitler somehow concluded that time was ripe to roll-out the next leg of his plan to conquer the world. He decided to attack USSR despite being advised against doing so by his best military minds, and being fully aware that USSR with its limitless depth, seemingly unending steppes and long, harsh winters had for centuries been the proverbial graveyard for invaders.

Haste to reach for the goals quickly in defiance of existing environment drove Hitler towards this fatal mistake. The ferocious resistance, followed by aggressive counterattack, by USSR’s red army led to the downfall of Hitler and his Nazi dreams.

Play to win, not to the galleries – Whether in investment or in some other walk of life, most of us fall prey to this fallacy where-in we work more to convince others – or even ourselves- that we are putting our best effort. Many fund managers churn their portfolio rapidly due to this behavioral bias.

Goalkeepers in soccer often succumb to this behavioral vice. In football penalty kicks often decide the fate of a match. Here speed of the ball after the kick is so high that the goal keeper can’t stop the ball if he waits for the penalty taker’s foot to hit the ball before making his leap. Instead he tries to read the body language and mind of the penalty taker to guess the direction of the kick – to his left, to his right, or at him as he stands in the middle – and makes his jump accordingly. As per a study of penalty kicks (source – Little Book of Behavioral Investing, by James Montier) roughly one third each of the kicks go to the left, right and centre. Further, the goal keepers leapt to the left or right on 94% of the kicks. Thus only in 6% of the shots the goalkeepers were standing in the middle – without jumping-even though 33% of the shots came at that position. Indeed the temptation to act overrides the commonsensical understanding that even if he rightly guesses the direction of the kick the goalkeeper does not stand more than 40-50% chance of stopping the shot in his left or right. On the other hand, if he were to keep standing at his position he would be able to stop 80-90% of the shots that came his way.

So, how to follow actively lazy style in investment

The key is to be aware of our predilection towards action. It is important not to confuse activity and results.

  • Reduce external stimulation of the mind – Cut off news, do not consume information with low shelf life, avoid newspapers and TV.
  • Practice and exercise – Read, analyze, discuss and gather evidence so that there is enough confidence to be lazy.
  • Recognize that most things are random, and generally have false causality – Then effort for control looks futile and refraining from high adrenaline action seems the better approach.

 

Advertisements