This is a question we get every so often – because as humans we’re told that more action equals better results. Not the case with investing. The simple answer is we chose our trading schedule partly for efficiency and partly for behavioural reasons.
First, let’s consider the heuristic simplification. According to the Nobel Laureate Herbert Simon, people receive so much stimulus, that they react to only a small part of it. So we use heuristics or “rules of thumb” to simplify our thinking, which works great in many aspects of life and can be very convenient.
But in the world of investment, it can have terrible consequences. We tend towards subjective information such as a share price / unit price, rather than an objective measure such as company data, underlying value or market conditions. We set artificial anchors such as when the price reaches $3 we will sell all or part without considering whether another investment would actually be better.
A second reason is that information causes behaviour. If we were to put a pop up on your computer or your phone that updated the unit price and your valuation every second, you would be encouraged to act more frequently and become a trader. But as proven by research, more activity just creates more transaction cost, which reduces returns. Those transaction costs also would push up our fees due to the processing time required and brokerage involved.
Third reason is the so-called information bias: the delusion that more information guarantees better decisions. Rolf Dobelli writes about this and many other biases in his bestseller “The Art of Thinking Clearly”. Knowing what the price is more frequently doesn’t achieve your goals more quickly or affect the markets or the performance of the company. It just affects your emotional disposition with what is noise.
Finally, there is the action bias where ‘surely doing something is better than doing nothing’. This is particularly likely to occur if others expect us or nudge us to act (and when we say others, we mean hyperbolic news headlines, Facebook investor groups or BBQ-chats with friends).
Action bias may also be more likely among overconfident individuals or if a person has experienced prior negative outcomes where subsequent inaction would feel like a failure to do something to improve the situation, even though action and reaction are completely independent.
We hope that explains our philosophy, and why we are firmly in the investing not trading camp. If you want to trade the short term fluctuations of a company, an exchange rate, a market; there is software and brokers available to support this – it’s just not our thing.
For now, our twice weekly trading cycle is a great solution for long term investors and those building their wealth for the future.