Why Value Investors Favor Inactivity

Content

Warren Buffett and his mentor — Benjamin Graham — on what is now attributed to Charlie Munger as "sit on your ass investing".

Inactivity ≠ Assiduity

While Munger's "assiduity" quote has nothing to do with the inactivity principle, the idea of trading as little as possible is common among Value Investors.

Warren Buffett

"Lethargy bordering on sloth remains the cornerstone of our investment style."

Warren Buffett, Berkshire Hathaway: Letter to Shareholders (1990).

"Inactivity strikes us as intelligent behavior."

Warren Buffett, Berkshire Hathaway: Letter to Shareholders (1996).

"1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group – the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. "

Warren Buffett, Berkshire Hathaway: Letter to Shareholders (2007).

Benjamin Graham

"While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster."

Benjamin Graham, Introduction, The Intelligent Investor.

"It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits."

Benjamin Graham, Chapter 1 - Investment versus Speculation: Results to Be Expected by the Intelligent Investor, The Intelligent Investor.

"Since the most profitable customers want speculative advice and suggestions, the thinking and activities of the typical firm are pretty closely geared to day-to-day trading in the market. Thus it tries hard to help its customers make money in a field where they are condemned almost by mathematical law to lose in the end."

Benjamin Graham, Chapter 10: The Investor and His Advisers, The Intelligent Investor.

Inactivity is thus one of the hallmarks of Value Investors. Buffett's baseball analogy of no called strikes is another great example of this principle.

Buffett: Activity Is Overrated

Given below are videos of Warren Buffett and Ajit Jain's 2011 interview in India, in which Buffett says "activity is overrated". Some of the other important points made during the interview are:

  1. Getting to choose who you associate with is a luxury.
  2. A life free of mistakes is a life of inaction.
  3. Have the willingness to walk away from things that others think are simple.
  4. Have the discipline to say no and not follow the crowd, do your own research.
  5. The stock market is a game stacked in your favor, just don't play it too often.
  6. Volatility is the Value Investor's friend.

Introduction: Buffett in India (2011)

Full Video: Buffett in India (2011)

Seth Klarman on Inactivity

In the following video, Seth Klarman — chief executive of the Baupost Group — explains why they have a holding period of three to five years; citing an anecdote from Tweedy, Browne Company LLC which too has its roots in Graham Value Investing.

"In 1968, Tom Knapp and Ed Anderson, also a Graham disciple, along with one or two other fellows of similar persuasion, formed Tweedy, Browne Partners, and their investment results appear in Table 2. Tweedy, Browne built that record with very wide diversification. They occasionally bought control of businesses, but the record of the passive investments is equal to the record of the control investments."

Warren Buffett, Columbia Business School: The Superinvestors of Graham-and-Doddsville (1984) [PDF].

Link
https://www.grahamvalue.com/blog/why-value-investors-favor-inactivity
Summary
The article discusses the investment philosophy of Warren Buffett and his mentor Benjamin Graham, emphasizing the principle of inactivity in value investing, often referred to as "sit on your ass investing". Buffett highlights that lethargy and inactivity are central to their investment strategy, arguing that excessive trading leads to diminished returns due to high transaction costs. He asserts that passive investors, through their inactivity, can achieve average returns with lower costs, while active investors often incur greater expenses that reduce their profits. Graham echoes this sentiment, warning that enthusiasm in trading can lead to losses and that many investors are misled by firms focused on day-to-day trading. The article also includes insights from Seth Klarman, who advocates for a long-term holding period of three to five years, reinforcing the idea that patience and discipline are key to successful investing. Overall, the piece underscores that inactivity, rather than constant trading, is a hallmark of successful value investing, as articulated by both Buffett and Graham.