What investors can learn from Meditation

Nov 27, 2023
This article has been written by James Gruber, assistant editor at Firstlinks and Morningstar Australia

The biggest problem that investors have is they can’t sit on their bottoms and do nothing. To set an investment goal, construct a portfolio, and then, sit still.

This struck me after going to the Morningstar Investor Conference in Sydney. Experts spoke on a range of topics, primarily macroeconomics and asset allocation. Views expressed included bonds offering both income and value, equities being overvalued, and interest rates likely staying higher for longer. These views provided insights into the current investment climate.

I wonder what investors do with this information. It might get them to take a view that bonds do offer good value and that they should be buying them. Or that they should reduce their equity holdings in case there’s trouble ahead. That is, taking a view on the future and allocating money to reflect that view.

Let’s face it, investors are saturated with market information and opinions. Overweight this, underweight that, ride this long-term theme etc. Yet in my experience, the best strategy is often to resist all of that and do nothing.

Admittedly, the phrase ‘do nothing’ misuses the English language. You can’t do nothing. You must do something. Though the phrase seems apt when it comes to investing. Because resisting the urge to trade requires immense mental fortitude. It isn’t a passive exercise, and in that sense, it is doing something.

It won’t win popularity contests

A speaker at the Morningstar Investor Conference, Vanguard’s Duncan Burns, revealed that his personal portfolio is so simple that his family and friends make fun of him. Here’s a guy with a Yale University degree and 25 years’ experience on Wall Street and his core portfolio is made up of a few market ETFs. Burns said he had a minor ‘satellite’ portfolio which had a value bias – that is, a long-term bet on value stocks versus the broader market. But he implied that his core portfolio rarely changed, barring regular rebalancing.

Burns’ remarks remind me of a recent article by JP Morgan Managing Director Jan Loeys, which suggests that investors love complexity and abhor simplicity. A complex strategy or portfolio sounds smart and sophisticated. Simplicity is often viewed as dumb and unsophisticated.

Given Loey’s an executive at an investment bank which makes money from trading, it’s fascinating that he believes the best portfolio for investors is simple:

“In principle, you do not really need more than two: a global equity fund and a broad bond fund in your own currency, with the relative amounts a function of your return needs, ability to withstand short-term drawdowns, and need to control long-term risk on your ultimate portfolio. This gives you very good diversification, clarity and simplicity on what you are holding, and high liquidity with minimum costs if held through passive funds, mutual or exchange traded (ETFs).”

What Loeys doesn’t mention is the secret is to then stick to a portfolio … and largely do nothing.

It ignores the future

Another speaker at the Morningstar Investor Conference, Simon Gresham from MFS Investment Management, said this: “The future has no facts”. It’s a great saying that suggests the future is always uncertain. History can be a guide to the future, but it’s just that, a guide. Any guesses about what may happen in future are just guesses. They may be informed guesses, though they should be treated with scepticism.

Most commentary about stocks and markets is about making bets on the future. However, if ‘the future has no facts’ as Gresham asserts, then these bets are best guesses about what may happen. They’re about applying probabilities to future events.

Doing nothing with a portfolio, or at least doing little, reduces the need to peer into the future. It ignores current market commentary and the whims of the day.

It’s a hard-earned skill

There are ancient traditions that consider doing nothing a virtue rather than vice. And that it can be learned.

Zen meditation involves sitting still and thinking of nothing. It sounds easy, right? Yet, I dare you try it for one minute. I can almost guarantee that your mind will quickly fill with thoughts. Some of them about your day, others random, and some downright odd. What you may realise how little control that you have over these thoughts. There are also likely to be few gaps or respite from the thoughts.

Meditation masters regard Zen meditation as one of the hardest of all meditations. That’s right, even the experts consider sitting still and doing nothing as excruciatingly hard.

What happens in Zen meditation though is that if you sit still for long enough, your mind has fewer thoughts and larger gaps of ‘nothingness’ in between. You can see thoughts as just thoughts, rather than facts. After such time, the mind seems calmer. Less distracted. More still.

What meditation suggests is that doing nothing is a hard-earned skill. For investors, it’s a worthwhile skill that can save them from their worst instincts, namely to trade and bet on the future. In this way, it can help build wealth in a simple, systematic way.

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