I’ve been thinking about this tempura restaurant in Kyoto. You may think tempura is not an art form. You may think you just throw some breaded vegetables or seafood into a deep fryer and minutes later you have a meal. You are wrong.

Tempura Yoshikawa in Kyoto has a small counter that seats 10 guests. An old man who is the head chef and a younger assistant slide open a door and enter the room. Not a word is exchanged as the older chef starts cooking. There are two large pots of oil that are used to fry the tempura and each piece is cooked individually in an order designed to ensure the oil temperature is perfect for each item. Each piece is cooked for precisely the right amount of time.  

The younger chef does nothing. Absolutely nothing. He just watches as each piece of seafood and vegetable is presented to the diners. The younger chef is an apprentice and this is the way he learns. To learn by observation takes an incredible amount of patience and humility. But the goal is consistency. The theory is that consistent perfection is only obtained with patience and humility. That is what it takes to learn to get something right.

Scallop

My picture of perfect scallop at Yoshikawa

We’ve all heard these stories from Japan. The sushi chef who spends a decade making rice before being allowed to touch a piece of fish. In western cultures this is hard to reconcile with our ‘give it a crack’ approach to learning. I’m not advocating for one approach or another. But I am advocating for investors to focus on humility, patience and consistency. That is the secret to achieving your goals.  

Some observations from a recent trip to the US

I recently spent a few weeks in the US. In-between visiting family and friends I was inundated with information about the election. This was despite my lack of interest in engaging in the cage match that US politics has become. I saw a lot of campaign ads and commentary – it was just unavoidable.  

A common theme was a lack of humility, patience and consistency. It was everywhere. From the electorate to the political commentators to the candidates.   

The message is clear. Putting effort into understanding an issue is no longer a pre-requisite to brashly declaring yourself as a leader who knows what to do. The facts no longer matter. Expertise and experience are openly ridiculed.

Consistency? Who cares. Just tell people what they want to hear and ignore the fact that your own past actions are inconsistent with your rhetoric. The humility to even briefly consider that you may be wrong is simply a sign of weakness.

This approach has permeated how successful investing in portrayed. I won’t even touch on the obvious examples of this behaviour – the meme stocks and the crypto bros. All investors are presented with a narrative about successful investing that openly mocks the impact of humility, consistency and patience on outcomes.

We are told the key to success is action. We should be nimble and confidently adjust our portfolio to take advantage of every twist and turn in the economy. Geo-political uncertainty is an opportunity to profit. Buy and hold is dead.

A cynic would suggest that this portrayal is deliberate. There are lots of people who profit off this picture of successful investing. More trading is good for brokers. The constant turnover also helps product providers who introduce more and more thematic and niche ways to invest with management fees that far exceed the vanilla options.

If it is all too overwhelming you can just pay somebody else to manage your money. To be one of these experts in today’s society means always having an opinion on what to do. There are no points for saying the best course of action is to do nothing.

It isn’t surprising that many investors think the key to success is constant activity. It plays into our natural action bias as humans. Deeply ingrained in our psyches from the first days we walked on this earth is the notion that survival is dependent upon fight or flight. There is a Saber-toothed tiger – do you run, or do you fight it?

We feel this same need to act as investors. There is always going to be new data, an articulate advocate for a certain action or the fear and greed that arise when markets plunge or surge.

The message has sunk in. In June of 2020 the average holding period of a share trading on the NYSE was 5 ½ months. This was down from 14 months in 2019. The average holding period has been dropping for decades after reaching a high of close to 8 years in the mid-1960s.

The problem is that in investing the best thing to do is often taking no action at all. Success in any endeavour is a function of finding your competitive advantage and making that your focus. Each of us can gain a competitive advantage simply by controlling what you can control. That starts with your own actions.  

How should you respond to the US Presidential election?

You are going to be bombarded with a lot of commentary in the next few days on the investment implications of the US election. I agree that the winner of the election will have a significant impact on people throughout the US and all over the world. Yet the case to take any investment action based on the results of the election is flimsy at best. How do I think you should respond? You guessed it - with humility, patience and consistency.

Humility

You will hear what you should do to position your portfolio after we know the results of the election. It will likely sound compelling. The views will be presented with absolute certainty. There will be few acknowledgements that markets are complex and that there are unexpected consequences and second order effects of any policy.

If you adjust your portfolio based on the election and expect to improve your returns you are likely wrong. Have the humility to accept that. And have the humility to accept it on behalf of whatever ‘expert’ is telling you to act.

Why do I believe this? I would argue it is common sense. A reaction to an event like an election is likely to be emotional. These are very difficult times to remain rational. Even if you happen to be right about the investment impacts you are likely too late.

There are plenty of people that have pre-positioned their portfolios for a certain election outcome. These same people will also likely react far faster than you can to each new piece of data that is signaling the election is going a certain way. They’ve been doing it for months.

Once you read some compelling sounding opinion in the media it is far too late to profit off it on the oft-chance it happens to be right. Longer term trends will not require you to act immediately. Slow down and take some time to think things through.

Stay humble over the short-term. Think about all the things you don’t know. All the things you can’t foresee. Save your confidence for the long-term. Achieving your investment goals will have nothing to do with how you ‘play’ this election. Get your asset allocation right. Diversify appropriately. Keep saving.   

Patience

Investing is a long-term pursuit. Don’t let a short-term event derail you. This election will represent the 6th time that the President has changed since I started investing on my own in university. In the 10 years I've been in Australia there have been 36 Prime Ministers. That is obviously a joke. I’ve spent the past month trying to explain the dumpster fire of US politics to people – please excuse my attempt at Australian political humour

The larger point is that things are going to change. The change seems profound, scary and unique as it occurs. Many of those feelings fade as time passes.

I looked through my top 20 holdings. One was initially purchased during the Reagon administration. Two during the Clinton administration, seven during the Bush administration, six during the Obama administration, three during the Trump administration and two under Biden.

The reason these are my winners is because I was patient. I didn’t rotate my portfolio when any of the countless changes to economic conditions occurred. I didn’t sell when one of the many horrible and scary world events occurred. I didn’t sell because something new and exciting came along or because short-term returns were poor.

Simply holding these positions has lowered the taxes I’ve paid. It lowered my transaction costs. It allowed the performance of the companies to compound throughout the business cycle. Perhaps most importantly, it lowered the behavioural impact of making poor decisions that our annual Mind the Gap study repeatedly shows.

This doesn’t mean that I haven’t made mistakes. It doesn’t mean that I haven’t purchased poorly performing shares and ETFs. The winners obviously rose to the top. Yet achieving your goal isn’t about getting each pick right. It is often just about getting a couple picks very right. That only happens if you hold them over the long-term.

More importantly a lack of patience has profound impacts on your outcomes. There is a significant amount of data suggesting that most people that trade frequently lower their returns – and that includes people who react to every event and try and position their portfolios accordingly.

Professors Odeon and Barber at the University of California performed a famous study of US brokerage accounts. The study looked at times when investors sold one investment to purchase another. The investment sold outperformed the one that was purchased by an average of 3.32% after 504 trading days.

Consistency

One of the best ways to be successful as an investor is putting structure around your decision making. That way you can be as consistent as possible. Consistency means having a set investment strategy that is designed to achieve your goal.

If your investment strategy is to speculate wildly after an election then go nuts. I don’t think that is a very good strategy. I think your strategy should provide a set of investment criteria that keeps you from kneejerk reactions to volatility. Your strategy should be about you and what is needed to achieve your goals. Face it inward and not on external events. Your reaction to external events is simply fear and greed driving your decision making.

My advice for anyone who doesn’t have an investment strategy is to take this next week to create one. And I’m not just trying to be flippant. Channel that action bias into something productive. There is always the possibility that an investment that perfectly aligns with your goals will become attractive after an event like this election. Understanding what those investments are and how to evaluate them will be helpful.

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To help you remember the value of humility, patience and consistency see below: