Making a Hundred Decisions When One Will Do

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Anyone who used Waze in the early days of the app probably has a story about going some roundabout route just to shave a few minutes off the ETA.

It didn’t matter if the route called for a last-second Jersey slide to get off the highway, an unprotected left turn down a sketchy dirt road, and a merge back onto the highway — Waze was going to save you that time.

You achieved the goal of arriving sooner. But was it worth it?

Applying extra effort to get a similar result is a common theme in investing. Tim Ferriss recently reflected on some investing themes throughout his life. Among them was the time and mental bandwidth he spent on active investing:

Lots of people actively invest in hopes of beating the market. What they don’t factor into their equation is the time spent to achieve that goal.

It follows basic opportunity cost logic: Every hour spent on your portfolio is an hour not spent on something else.

After devoting hundreds of hours to research, honing your strategy, and orchestrating trades, it's not good enough to match the historic market return of 9% because most other investors achieved that by doing nothing at all. That includes everyone from nurses to software engineers to accountants. Anyone can take advantage of that return.

The difference is that they're also earning income elsewhere. As if outperforming the market isn't hard enough, the active investor needs to generate more return than not only the market, but also more than they would have otherwise made doing something else.

Someone who parks their money in index funds can go out and use the freed-up time to their advantage. A year passes and that person will have captured any gains in the market plus their income.

Now let's say the trader does outperform the market that year. Can they do it over and over again, for decades? Maybe, but probably not. It's impossible to know until those years pass. To quote myself:

The reality is that even a lifetime of dedication to trading doesn't come with a guarantee of outperformance. There’s no evidence that, on average, the more you try, the better you’ll do. This isn't learning the clarinet or going to the gym. It’s not one of those fields where input equals output.

Many want to always be taking action with this idea that their actions will lead to better results. It makes sense, that's how a lot of things in life work. But in investing, the evidence is actually the opposite — if you fiddle with fewer knobs and make fewer decisions, on average, you’ll do better over time. 

In a recent blog post, my friend Cade put it this way:

While some people might relish the challenge of actively trading and trying to outsmart the market, the juice often isn't worth the squeeze. Most people are better off finding a reliable source of income and investing their money in the market with a low-maintenance strategy. In the game of investing, there are no bonus points awarded for difficulty.

— Sam

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