How much time does it take to be a Cognitive Investor? (part one)

I have heard many investors lament, “I don’t have time to invest my money intelligently.”  Inherent in this statement is an assumption: successful investing requires a large amount of time.  They think it requires time to keep current with the latest market action, time to analyze companies, time to investigate various investment techniques, and time to learn about investing.

The truth is that is doesn’t take nearly as much time as one might assume, as long as the time is spent effectively.  Vast amounts of time are wasted by multitudes of investors who attempt to do the impossible.  They try to discern the future direction for various markets and securities or seek out someone who has a clear crystal ball.  They carefully listen to bullish and bearish arguments about the short-term future market moves and assess which viewpoint has more validity.  They continually seek out more data and opinions to clarify the situation.  This is a fruitless task.  No matter what the situation, there will always be a roughly equal number of plausible arguments about markets going in one direction or its opposite. 

Two excellent books have been written about how misguided we are about trying to predict the future, and how oblivious most people are to this basic fact.  The books are The Fortune Sellers: The Big Business of Buying and Selling Predictions by William Sherden and Future Babble: Why Expert Predictions Fail—and Why We Believe Them Anyway by Dan Gardner.  Both authors amply demonstrate how bad even so-called experts are at making accurate predictions, and that this capability is something that will never be improved with practice.  The future is simply unknowable, and investors need to build this essential fact into their decision-making process.  Warren Buffett said, “If somebody handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or interest rates or whatever it might be for the next two years, we would not pay any attention to it.”  By not paying any attention to such predictions, you will save yourself valuable time that can be spent on more fruitful endeavors.

In a similar vein, most economic data can be dismissed as useful market indicators since markets anticipate economics, not the other way around.  Markets are the leading indicator.  Economic indicators (even the leading ones) lag the markets.  Studying lagging indicators is as useful as looking at a caboose to figure out where a train is going.  So examining the most recent economic data is another large domain that wastes the time of many investors.

You can also safely ignore how the stock market performs on a daily basis, which is duly reported by many mainstream news services.  Most daily moves are nullified by subsequent moves and only about 3% of the daily moves are significant, and you will not know which 3% until much later.  Checking the market level about once a quarter or twice a year is sufficient.  Daily monitoring is like listening to static on a radio: just meaningless noise.

If you make the intelligent decision not to buy individual stocks, but stick to index-based investments such as exchange-traded funds (ETFs), you will also save the time and effort required to keep up with the latest developments of individual companies.  You are deluding yourself if you think that you can access publicly available information about various companies and somehow discern the best investment choices.  The analysts and portfolio managers for mutual funds who do this for a living can’t outperform market averages, and they have far more resources, better access to company insiders, and technical backgrounds for such analysis.

So if you don’t spend any time focusing on future predictions, economic data, daily market movements, and company-specific information, what should you spend your time doing?

Assuming you already have a cognitive investing portfolio, you periodically compare your portfolio to its targeted allocation and make adjustments.  You don’t need to investigate new securities.  The ones you own will probably suffice.  You focus on how much to buy or sell, rather than trying to optimally time your purchases and sales or trying to figure out what additional securities seem like tomorrow’s winners.  Consider the demonstration portfolio on this web site.  I calculate its variance against its target allocation shortly after the end of each quarter.  If necessary, I place (virtual) trades to bring the portfolio much closer into its targeted allocation.  This operation should take no more than an hour or two, four times a year.  In the meantime, I can ignore the pointless market chatter and speculations about the future, and do something more productive with my time.

Investing success is not directly proportional to the amount of time or effort expended, but rather on the quality of the underlying process.  This differs tremendously from most jobs, in which the amount of activity, as measured by time, is somewhat proportional to results achieved.  Generally speaking, the more time and effort you expend, the more you produce and the more you earn.  But in the investing realm, your money is supposed to do the work, not you.  So let your money do its work (this takes time, though).  Spend your time and attention doing something else.

This minimal time commitment is fine if you already have a cognitive investing portfolio.  But what if you don’t have a cognitive investing portfolio?  How much time will it take to learn about cognitive investing and convert your existing portfolio into one or create one from scratch?

That is the topic of part two.

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