Why Inaction is So Hard in Active Management

Baseball season starts this weekend.  I grew up on the diamond and Buffett’s waiting for your pitch idea has always resonated with me, sometimes to the point of mistakes of omission.  I frequently wonder why it is so hard to apply this line of reasoning to investing.

In almost all other areas of life, when you want to do something well, you actively pursue it.  You like a girl, you actively pursue her, bring her flowers, call/email/text her (trying of course to stay on this side of the stalking line).  If you want a job, you actively submit a resume, seek an interview, follow-up after interview, etc.  If you are preparing a sales pitch, you do your research, you prepare what you are going to say and practice your pitch.  Last, but not least, if you are Derek Jeter or any other baseball in-fielder, you know that 9 out of 10 times, it is better to aggressively attack a ground ball, so you can control when and where you approach it, hoping to head off the inevitable wild bounce.

Investing is the most counterintuitive aspect of my life when it comes to being successful.  As an investor, I have a list of companies that I believe are good investments and all I can do is wait.  If they are good companies, but are overvalued, I can only wait till they come down in value.  If they are good companies selling for a fair price and I have purchased the stock in the company, I can only wait until others realize this and the price appreciates.  Even activist investing provides no guarantee of success.

Think about the analyst or senior portfolio manager at most funds.  If you spend enough time investigating a company, you are going to want to show something for your work.  There is a large incentive to show a credible investment.  The analyst that hasn’t brought you any “investable” ideas in the past 6 months raises suspicion that something else may be occupying his time.

Personally, I have a list of about 150 companies that I understand and feel comfortable with my estimate of their valuation.  Currently, very few of those valuations are close in market price to my estimation of their value.  I have two alternatives, I can either review my estimates and hope to re-work the numbers to increase my estimation to better align with the current market price or wait.  Waiting is very passive and runs counter to our culture of activity=success.  I believe this equation of activity=success is difficult to shake when it comes to investing.

 

 

As a side note: This dilemma is another reason why I think the structure of a fund is so critical.  If you are charging a straight assets under management fee, there is a further incentive to “earn that fee.”

Leave a Reply

Your email address will not be published.