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 trading, high-frequency trading, etc. -- and not enough time realizing that the average country bumpkin who knows nothing about investing holds huge advantages over professionals.
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 news anchors 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.