Have you ever realised that even a very mediocre investment portfolio self corrects over time?…provided it is left alone. And that ‘leaving alone’ is where most of us really suck.
To compound at a high rate, you would keep replacing the ones which are not performing with ones which are likely to perform. However in the process, you need to do a lot of things…and the more you do, the more are the chances of errors creeping in…how often do we see the businesses that we sold, start doing well? And the ones we hold, stagnate… making us wanting to tweak even more?
An extreme mental exercise (some exaggeration) : Imagine you start with a portfolio of $100K and invest $5K each in 20 different businesses. You completely leave your portfolio alone for the lifetime….and turns out that you were wrong with 19 (95% of your selections) and they all go to ZERO…however just one of them turn out to be a high quality compounder and compounds @ CAGR of 18%….after a lifetime of say around 50 years, you end up with a portfolio of $19.6M, translating into a 11.1% CAGR on your starting portfolio. A kind of performance that is very difficult to beat by active managing…just because you possessed the extremely rare quality of ’Not doing anything’, your portfolio self corrected….and the only performer became a larger and larger % of your holdings (which is what you wanted in the first place anyway) till it finally became 100%… delivering a very happy outcome for you over your lifetime. Chances are very high that an active management would have forced you to exit this gem long long back…apart from this comes the huge obvious benefits of Tax and commissions that you save. Our innate innumeracy prevents us from realising this.
Not doing anything (or doing very less) has an implicit humility built in…the very thought process that whatever we do could end up being sub-optimal…so let us have the known super-performer ’Time’, do most of the work for us. This super-performer delivers on 100% of the instances, as long as we don’t micromanage it’s job. All we need to do is make a reasonable selection and take care of our health. This is very difficult to achieve as it hurts our ‘human ego’ to think like this. There is a reason why 99.99% of investors will end up with a lifetime performance that is way below that 11%… Munger and Buffett understood this early in their careers
‘All of men’s miseries derive from not being able to sit in a quiet room alone’ – Blaise Pascal
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