Investment Strategy update: The Discovery of Slowness
The discovery of Slowness
The last book I read was a German novel called “The Discovery of Slowness” (in the English Translation) from German writer Stan Nadolny.
The book is a ficticious story about a real person, the famous English explorer John Franklin.
In the book, John Franklin is an extraordinarily slow person who has a rough start into life as a kid. He always needs a lot of time to answer questions or react to things happening. During his life, this weakness turns into a strength. More than once, his slowliness and deliberate long thought process leads to a superior solution compared to the “first impulse”.
For instance once, after their ship goes under, he and his comrades find themselves themselves stranded on a flat corall bank. Whereas his fellow sailors start shouting for help etc., he directly starts to build a platform in order to survive the high tide and thereby saves all his comrades. When he was asked later why he did this he says “As I am so slow, I have to start early”. In another situation, a ship under his command gets in into a storm in the Arctic seas and is at risk to get destroyed by Icebergs. His men start to panic and want to get away. He takes his time and finally contra-intuitively stears the ship into the solid ice as this is the only safe place in a storm and they survive.
During his life, he turns his weakness into a strength by preparing himself extremely diligent for any unforseen problems. As it turns out, good preperation is almost always better than fast reaction time. He is calling this preparation a “system”. One of the core pillars of this system is to have an organization run by two person: One “fast” one for the daily work and a “slow” one for the really important decision.
Despite the book being a good read itself (kind of a Forest Gump story with a Victorian English setting), the more I read the more I had to think of investing and Warren Buffett in particular.
Compared to today’s financial technology (Twitter, High Frequency Trading etc.), Warren and Charlie look as slow as John Franklin in the book. They are so slow that they actually missed the whole first dot.com bubble and many other hypes. However, by creating Berkshire as a permanent investment vehicle and holding a big cash pile, they prepared themselves well for any kind of troubles.
Both have stressed themselves the advantages of being slow many times, either Charlie with his “sit on your ass investing” or Warren’s “Punch Card”. From the outside I would even say that they employ the “Franklin system” to a certain extent. Warren seems to be the fast guy and Chalrie is the one who makes the big changes, like steering Warren to “great” companies many years ago.
For many investors, including myself, this often sounds counter intuitive. Real time stock prices, twitter feeds, mobile phone trading etc. enable us to do everything real time, so why should we care what those old farts say ?
Well, one aspect of this a pretty tangible one: Capital gains tax. In Germany, as a private investor, you pay around 30% capital gains tax. For fun, I made a quick table with the following assumptions:
– Underlying annual return 12% p.a.
– investment horizon 30 years
– Capital gains tax 30%
The following table shows the total return over 30 years depending on how often the portfolio is being “turned over”. So 1 means: The portfolio is turned every year, 5 year means 6 turns within 30 years etc.. These are the results:
| turnover/year | Total gain AT | p.a. AT | in% of max |
|---|---|---|---|
| 1 | 1024% | 8,4% | 35% |
| 2 | 1735% | 10,2% | 60% |
| 3 | 2061% | 10,8% | 71% |
| 4 | 2284% | 11,1% | 79% |
| 5 | 2363% | 11,3% | 82% |
| 6 | 2444% | 11,4% | 84% |
| 7 | 2529% | 11,5% | 87% |
| 8 | 2616% | 11,6% | 90% |
| never | 2896% | 12,0% | 100% |
The results are logical but still striking: Over a thirty year period, if one turns the portfolio every year, the result is roughly 1/3 of a portfolio which remains constant over the 30 years. It is also interesting that the total result increase over-proportionally with every additional year of the average holding period. Already with a 4 year holding period one captures almost 80% of the total yield.
One remark: Please don’t confuse this withe an advice for dax driven investments. This is just to illustrate that slow portfolio turn-over has adnatages.
Secondly, and even more important, being slow in my opinion is the best defense against any kind of behavioural biases. The book was written well before Danial Kahneman’s famous book, but clearly shows that slow thinking leads to better decisions which is especially important in investing.
In the past, I have often reacted to quickly, which resulted either in selling too early or buying to quickly. Especially when prices move significantly within a short term, some behavioural biases like anchoring become very strong. Maturing as an investor in my opinion means among other things, to become slower.
However this is more easy said that done. A large part of the investment industry is hard wired to make investors trade as often as possible in order to generate fees. If you watch CNBC or read investment magazines, they always emphasize to buy or sell things now and not wait until it’s “too late”.
Consequences
As I have written in some of my comments, I am aiming to lengthen my holding periods anyway, but I still think I am too fast. For me, I have come up with 3 very concrete action items which should hopefully help me in becoming a lot slower:
1. I will limit my news feed to high quality sources. I will abandon high frequency stuff like Zero Hedge and Clusterstock
2. I will stop writing monthly performance comments and switch to quarterly
3. I will create my own “soft punchcard”: I will limit myself to either 1 new position or 1 complete sale of a position per month. Increasing or decreasing existing positions is still allowed.
A little explanation for point 3, as this is a real “hard restriction”: This means that at a maximum, I can “switch” 6 stocks a year into new ones. I have to sell one first in one month and buy the new one in the next. As I own on average 25 positions, this should translate over time to a holding period of at least 4 years, preferably more.
This will of course limit my choice to do for instance soem short term special situations, on the other hand I hope that this will further improve my investment decisions and focus better on the long term. I would love to have an brokerage account which would actually limit me on the number of trades I could do in a month.
value and opportunity 