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Things You Can Do That Wall Street Can’t

Let me tell you my two favorite stories of the financial crisis.

One: According to Vanguard's Center for Retirement Research, just 3% of Vanguard customers actually cashed out of stocks during the financial crisis. In the summer of 2011, when stocks fell 19%, 98% of Vanguard investors didn't make a single change to their portfolio. Amateurs can be pretty good at exploiting the power of buy and hold.

Two: I remember watching CNBC in March 2009, when the S&P 500 bottomed out 70% below where it is today. David Faber noted that every trader he talked to knew a big market rally was coming. "So, how are you invested?" Faber asked them. "In cash," the traders replied. Why? Faber said it was because they couldn't afford to have another down month. It didn't matter if they knew a rally was coming. That rally might not come for another month or two, and they couldn't stand going to their bosses, or their investors, and explaining why they lost money again. So they hid in cash, knowing full well they'd lose out on part of the rebound (which they did).

Amateur investors had something pros couldn't dream of in 2009: the ability to be blissfully ignorant.

People spend too much time complaining about the advantage Wall Street has over them -- insider trader, high-frequency trading, etc. -- and not enough time realizing that the average country bumpkin who knows nothing about investing holds huge advantages over professionals.

For example:

You can say, "I don't know."
The world is really complicated. There are things we just can't know. But analysts can't say, "I don't know." They're hired to know. When you're asked to have an opinion about things that are inherently unknowable, you are forced to make stuff up. Watch CNBC reporters ask their guests where the market is going to be a year from now. You may as well ask a goldfish for his one-year market forecast, and everyone knows this. But that's not the point. The point is that the analyst is paid to have an opinion, and he or she would love to share it with you. As John Kenneth Galbraith said, "Pundits forecast not because they know, but because they are asked."

The worst part of this is that people forced to have an opinion about things they can't possibly know begin taking their opinions seriously. That's dangerous, because overconfidence in things that are random and unknowable inevitably leads to misbehavior. Having the ability to say, "I don't know, and I'm not going to pretend I do," is worth its weight in gold.

You can do nothing when nothing needs to be done
"Do nothing" are two of the most important words in investing. Buying a portfolio of stocks or index funds and not touching it for years, even decades, can be a great option for most investors.

But if investing is your full-time job, doing nothing isn't an option. I think most professional investors know deep down that doing nothing -- just letting compound interest do its thing -- is the most rational investment approach. But no one can justify a 1% management fee for watching paint dry. So they trade, rotate, take money off the table, worry, overreact, and generally makes fools of themselves. The person who bought an S&P 500 index fund 30 years ago and checked his brokerage statement for the first time yesterday could legitimately call himself as one of the top investment managers in the country. That's the power of having the ability to do nothing.

You have the ability to change your mind
I feel bad for investors who work for organizations called "Peak Prosperity," "The Gloom, Boom, and Doom Report," "Euro-Pacific Capital," "The Active Bear," or "Shadow Stats." Their mind is already made up and can't be changed even when the world around them changes -- they'd literally have to rename their company. 

Not being attached to a market theme, or a broad worldview, is so important to becoming a good investor. The world doesn't care if you're a card-carrying bull, bear, Keynesian, Austrian, Democrat, Republican, Fed critic, or environmentalist. Anytime you say, "I'm a ..." you're doing yourself a disservice as an investor. "I'm flexible and I understand the world changes" is the only rational stance.

You can not care about your reputation
I've heard that 70% of a congressman's time is spent raising money for reelection. I doubt professional money managers are this burdened, but many investment managers -- especially small, newer ones -- devote enormous time and effort to finding new clients and raising more money.

Perception can be bigger than performance, and professional investors know this. So you see some crazy behavior, like mutual fund managers selling declining stocks at the end of the year just to avoid disclosing in their annual reports that they owned losers, even if they still like the company as an investment. Or sticking to a losing strategy long after they realize it's wrong just because they don't want to admit to their customers that they were wrong.

You're probably managing money for yourself and no one else. That's great. Being able to not care what other people think of your investments is a huge advantage.

In his book David and Goliath, Malcolm Gladwell wrote that "there is a set of advantages that have to do with material resources, and there is a set that have to do with the absence of material resources -- and the reason the underdogs win as often as they do is that the latter is sometimes every bit the equal of the former." Sometimes, they're more than equal.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (22) | Recommend This Article (84)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2014, at 3:29 PM, JamesBrown wrote:

    Years ago, I asked a money manager, "Do you think interest rates are going to rise this year?"

    His brilliant answer: "I think I don't know."

  • Report this Comment On March 06, 2014, at 5:16 PM, bella66 wrote:

    Thank you for a great article. I have to agree with you that having good stocks and riding it out is the best of good investments.

  • Report this Comment On March 06, 2014, at 7:19 PM, spencomp wrote:

    For years I had a post it note above my desk on the wall where I posted investing ideas (on paper!) it read: "When in doubt do nothing!" It has saved me from myself many, many times. Thank you for the great reminder of this simple idea!

  • Report this Comment On March 06, 2014, at 8:34 PM, fuzzy441037a wrote:

    years ago,i had a mutual fund sales man(friend of the family)tell me he gaurenteed 15% return .I got rid of him

  • Report this Comment On March 07, 2014, at 7:54 AM, gratefuldba wrote:

    Thanks so much for reminding us about our enormous inherent advantages. Investing for over three decades, I've managed to forget them many times. Would be great if Motley Fool would keep reposting this periodically for us as a timely reminder. Thanks again !

  • Report this Comment On March 07, 2014, at 9:31 AM, oldfart65 wrote:

    DEAD ON! Stock analysts, weather people and economists are the only jobs where you are wrong 95% of the time and still earn $200k per year.

  • Report this Comment On March 07, 2014, at 10:16 AM, KBecks wrote:

    Awesome article Morgan! I often get discouraged when I hear the term "retail investor" used like we're the sheep. That can be true sometimes, but I appreciate you pointing out our humble but valuable advantages as investors.

  • Report this Comment On March 07, 2014, at 10:44 AM, DivingDan wrote:

    The ability to say I don't know and I made a mistake are the two most honest answers we can make to ourselves. I've said them both and learned from them.

    And I'm not a trader... I'm an investor. Big difference.

  • Report this Comment On March 07, 2014, at 10:59 AM, observerbob2013 wrote:

    I have been investing and trading for over 50 years.

    The most important mistake most "investors' make is that they do not realise that this is a serious job which requires experience and a work-attitude.

    People who trust others to manage their money affairs rather than to rely on their own judgement will almost certainly lose money and pay huge fees.

    In the long run investing and trading are parts of the same occupation. If you do not understand the market then it is best to look only at long term earnings companies and stay with them.

    If you have both the time and more importantly the aptitude you will make far more money by a combination of investing and trading by trading stocks you are happy to have long term on both the upswings and down but you need to adjust the amounts between your passive and active portfolios according to your own abilities.

    Always remember to listen to everyone but make your own decisions and take responsibility for your decisions

  • Report this Comment On March 07, 2014, at 11:14 AM, uncletom wrote:

    I've been an invester for only a few years. I've learned that common sence can make you alot of money. Thanks for the reminder!!

  • Report this Comment On March 07, 2014, at 12:46 PM, dreamimmigrant wrote:

    This was a great article and the same advantage of "time" and not having to beat the market has always been on my mind... my first priority has always been to make sure that I preserve capital, address inflation and anything beyond that is just a bonus and that has been working great..

    Having read your article, I'm starting to feel sorry for the honest wallstreet trader who tries to be honest with his clients, to his employer and to himself. He has to keep trading to generate profits and avoid losses for his firm and stay employed in what seems to be a cut throat competitive industry... on one hand I'm glad I'm a simple middle class guy enjoying life without these stresses and on the other hand, I can't stand wall street hype.

  • Report this Comment On March 07, 2014, at 1:03 PM, sunrizesurfer wrote:

    I worked at putting money away over the past 24 years (since I was 18). My investments let me put a down-payment on my house and avoid the mortgage insurance (what a waste) the bank required if we didn't put 20% down. It has put an anniversary band on my wife's hand, helped the family trade up into a newer, larger home, as we grew from 3 to 4; it has helped replace the old junker with a newer junker several times; it has helped my wife and I put thousands of dollars away for both our children's college expenses, when that time comes.

    Investing has taught me lessons I am teaching my children. They have 529 plans, plans, and will soon have Roth IRA's. This gives my heart a warm, fuzzy feeling- so rare and so wonderful. All in all, I did the best I could, and If I never see my million, I learned a lot along the path and imparted valuable knowledge to those I love. My life is richer, in many ways, due to investing. I learned from the mistakes I made, and will continue to appreciate the blessings as they come.

    Great article.

  • Report this Comment On March 07, 2014, at 2:23 PM, skywayken wrote:

    hi im new to fool

  • Report this Comment On March 07, 2014, at 5:04 PM, perfectcompany wrote:

    There's one other thing small investors can do: buy small companies or companies with little float. A large investor would overwhelm the trading in some stocks, but smaller investors can enjoy the early ride. For instance, my shares of ANCUF are up 101%; it's a $10.9 billion market cap but an obscure company with very little float. Together, CTMMA and CTMMB have about a $30 million market cap, which is up 95% since I bought it. It's a profitable comic book company that could grow for a long time.

  • Report this Comment On March 07, 2014, at 7:56 PM, jlclayton wrote:

    perfectcompany, a small company that has no institutional ownership can definitely deliver returns over and above much larger companies. However, those small companies also come with much larger risk, and may or may not be appropriate for many investors' portfolios.

  • Report this Comment On March 08, 2014, at 8:20 AM, daveandrae wrote:

    Another advantage is concentration. A portfolio of 5 high quality stocks that you know a lot about is plenty of diversification.

  • Report this Comment On March 08, 2014, at 10:20 AM, AnsgarJohn wrote:

    Here's some CNBC video from March 2009. Lot's of retail investor panic:

  • Report this Comment On March 13, 2014, at 12:35 AM, LazyCapitalist wrote:

    Another thing we can do that Wall Street can't:

    I own shares of a small, but fast-growing, profitable, dividend-paying, NASDAQ-traded company. Yesterday the trading volume was just under 3,000 shares at a price about $14.18 a share.

    It would take forever for a big Wall Street player to accumulate a meaningful position on the open market (or quite expensive). And even if they wanted to accumulate a meaningful position, at a market capitalization of just $230 million, they'd have to purchase a huge percentage the entire company for it to be worth their wild.

    As just your average investor though, it is quite easy for me to accumulate a meaningful position in said company (meaningful for me, at least). It doesn't take that many shares for it to comprise about 8% of my stock portfolio. Wall Street's loss is my gain.

  • Report this Comment On March 14, 2014, at 3:39 PM, ElliotJStamler wrote:

    Once again Morgan Housel has written pure gold. Not since Louis Rukeyser have I read anyone with great insight, acumen and prescience. I urge MF to put together a book of his columns for us to would be terrific.

  • Report this Comment On March 14, 2014, at 4:13 PM, rtinpsretired wrote:

    This is my first ever post and I just want to proclaim the excellence of the Fool's approach. I have never properly rewarded them financially for their advice, but I have been the beneficiary and will be eternally grateful for their guidance. First of all, I took their advise on a GM investment some 2.5 years ago at a low point in the stock's price. Not that it didn't go lower, but it did go up. Now the stock is fluctuating because of recalls, management change, and other news worthy items beyond our control. I still hang onto the Fool's approach of buying and holding what I consider to be a valuable asset, no matter how the market is valuing that asset at any given time. I have never been shy about repeating myself, and I say again, their advise is sound...we don't know what the market will do tomorrow after digesting the latest news and forecasts, but we know that a good investment will reward us over time. Thank you many times over for your sage advice.

  • Report this Comment On March 15, 2014, at 1:06 PM, pelicangirl wrote:

    The best statement is the ability to 'do nothing'. I have been watching this inflated bull market, reading my SA newsletter and each time I run the numbers nothing. YOU may consider it time to make some buys; I think most stocks are crazy. I did add to my KO holdings because I felt the price/time was right. But for the rest, I did nothing. Sometimes we have to step back and evaluate our buy, buy, buy and sell, sell, sell habit. This is why they call it investing and not casino night.

  • Report this Comment On March 20, 2014, at 7:31 PM, boogerface02211 wrote:

    Once again you have hit the nail on the head. Why? Because you da man.

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