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Things You Can Do That Wall Street Can’t

Morgan Housel
March 5, 2014

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<