Warren Buffett’s Wisdom: Why Less Motion Equals More Returns

At the Wing Chun kung fu school my fam­i­ly and I are part of, there is a com­mon say­ing: “Motion is lotion”. When­ev­er my mus­cles, joints, bones and ego are sore after one of our spar­ring ses­sions, our Sifu will tell me that some gen­tle exer­cise should help.  Mov­ing your body, get­ting blood into the joints, loos­en­ing up the mus­cles, can be heal­ing.  

In the world of mar­tial arts, motion can be heal­ing, but in the often tumul­tuous world of invest­ing, too much motion can be a recipe for dimin­ished returns.

War­ren Buf­fett, in his 2005 annu­al let­ter to share­hold­ers, told this sto­ry: 

“Long ago, Sir Isaac New­ton gave us three laws of motion, which were the work of genius. But Sir Isaac’s tal­ents did­n’t extend to invest­ing: He lost a bun­dle in the South Sea Bub­ble, explain­ing lat­er, ‘I can cal­cu­late the move­ment of the stars, but not the mad­ness of men.’ If he had not been trau­ma­tized by this loss, Sir Isaac might well have gone on to dis­cov­er the Fourth Law of Motion: For investors as a whole, returns decrease as motion increas­es.”

What does it real­ly mean? And how can we apply it to our invest­ment strate­gies? 

Under­stand­ing the Phi­los­o­phy

Buf­fet­t’s phi­los­o­phy is root­ed in the belief that the more times you trade or change your invest­ment posi­tions, the less your returns are like­ly to be in the long term. This might be counter-intu­itive, espe­cial­ly when con­trast­ed with the fre­net­ic pace of mod­ern-day trad­ing, where con­stant motion and rapid deci­sion-mak­ing are often her­ald­ed as the path to suc­cess. Those of us old enough to have grown up watch­ing Gor­don Gekko in Oliv­er Stone’s “Wall Street” will remem­ber how he quick­ly trad­ed in and out of stocks based on his secret intel. That and his time­less advice, “if you need a friend, get a dog”. 

The Allure of Active Trad­ing

In today’s fast-paced world, active trad­ing can be seduc­tive. The thrill of buy­ing and sell­ing, the adren­a­line rush of mak­ing quick deci­sions, and the allure of poten­tial quick prof­its can be intox­i­cat­ing. But is this the right approach for long-term suc­cess as an investor?

Buf­fett sug­gests oth­er­wise. His invest­ment strat­e­gy is char­ac­ter­ized by patience, dis­ci­pline, and a long-term vision. He believes in under­stand­ing the intrin­sic val­ue of a com­pa­ny and hold­ing on to invest­ments for the long haul.

The Impact of Bro­ker­age Costs

One of the rea­sons that returns may decrease with increased trad­ing is the asso­ci­at­ed costs. Every time you buy or sell a secu­ri­ty, you incur trans­ac­tion costs, includ­ing com­mis­sions and fees. These can add up over time and eat into your returns. 

Bro­ker­age for a sin­gle trans­ac­tion can start as low as $5 for an app, and be as high as 2.5% of the trans­ac­tion if you use a full ser­vice bro­ker. Five dol­lars may not seem like much at first glance, but it adds up and we need to learn to think of it in terms of how it impacts our returns. 

Take this sce­nario — let’s say you have $10,000 to invest, you’re buy­ing 10 x $1000 parcels of stock and you’re pay­ing $10 bro­ker­age per trans­ac­tion. You’ve spent $100 (1%) of your start­ing cap­i­tal on bro­ker­age. And let’s say that over the course of the first twelve months, you have to replace one of your posi­tions, on aver­age, once a month. That means you’ll have two trans­ac­tions every month — one sell and one buy. Over the course of the year, that’s anoth­er 22 trans­ac­tions and $220 in bro­ker­age. Added to your ini­tial bro­ker­age, you’ve spent $320 (3.2%) out of your $10,000 cap­i­tal on bro­ker­age. 

Now, if you’re a very suc­cess­ful investor, you might be able to match the aver­age growth of the mar­ket, which is around 10% per year on aver­age. Keep in mind that the vast major­i­ty of pro­fes­sion­al fund man­agers can’t man­age to match the mar­ket over the long-term, so per­haps that might be ambi­tious for an ama­teur who is just get­ting start­ed. Let’s say you aver­age a 7% annu­al return in your first year. But you’ve lost 3.2% on bro­ker­age, so your net return is actu­al­ly only 3.8%. 

You can get bet­ter than that by putting your cash into a sav­ings account with far less effort.

Addi­tion­al­ly, fre­quent trad­ing can lead to unfa­vor­able tax con­se­quences, as you have to pay cap­i­tal gains tax on any prof­its you take. If you leave that mon­ey invest­ed, it can com­pound over time. 

The Pow­er of Patience

Buf­fet­t’s phi­los­o­phy empha­sizes the impor­tance of patience in invest­ing. By care­ful­ly select­ing invest­ments based on fun­da­men­tal analy­sis and hold­ing them for extend­ed peri­ods, investors can ben­e­fit from the com­pound­ing effect of returns.

The Virtue of Val­ue Invest­ing

Buf­fet­t’s invest­ment approach, known as val­ue invest­ing, focus­es on iden­ti­fy­ing under­val­ued com­pa­nies with strong fun­da­men­tals. By invest­ing in these com­pa­nies and hold­ing onto them, investors can reap the rewards of their growth over time. Of course, that doesn’t mean that you nev­er sell a stock. It means that if you do sell it, you sell it for the right rea­sons. 

Avoid­ing the Noise

The stock mar­ket can be noisy, filled with dai­ly fluc­tu­a­tions, news, and opin­ions. Much of the invest­ing indus­try, includ­ing the finan­cial media, fin­tokkers, finan­cial tip sheets, stock bro­kers and online trad­ing plat­forms, need to make a lot of noise. Their entire busi­ness mod­el is pred­i­cat­ed on peo­ple trad­ing a lot and often. It’s good for them but not so good for the investors them­selves. 

By tun­ing out this noise and focus­ing on the under­ly­ing val­ue of invest­ments, investors can make more ratio­nal deci­sions. This approach aligns with Buf­fet­t’s belief in reduc­ing motion to increase returns. 

Apply­ing Buf­fet­t’s Wis­dom

So, how can you apply this wis­dom to your invest­ment strat­e­gy?

• Under­stand Your Invest­ments: Take the time to research and under­stand the com­pa­nies you’re invest­ing in. Look for intrin­sic val­ue and sol­id fun­da­men­tals.
• Embrace Patience: Resist the temp­ta­tion to trade fre­quent­ly. Hold onto your invest­ments and allow them to grow over time. Only sell if you have a very sol­id rea­son. 
• Avoid Emo­tion­al Deci­sions: Don’t let dai­ly mar­ket fluc­tu­a­tions dri­ve your invest­ment deci­sions. Stick to your strat­e­gy and avoid react­ing impul­sive­ly.
• Con­sid­er Costs: Be mind­ful of the costs asso­ci­at­ed with trad­ing, includ­ing fees and tax­es. These can erode your returns over time.

War­ren Buf­fet­t’s insight that “returns decrease as motion increas­es” is more than just a catchy phrase; it’s a guid­ing prin­ci­ple that can lead to more thought­ful and suc­cess­ful invest­ing. By embrac­ing a patient, val­ue-dri­ven approach, investors can reduce the “motion” in their port­fo­lio and poten­tial­ly increase their long-term returns.

In a world where the buzz of active trad­ing often drowns out the voice of rea­son, Buf­fet­t’s wis­dom serves as a reminder that some­times, less is indeed more. In the pur­suit of finan­cial suc­cess, slow­ing down and adopt­ing a thought­ful, long-term per­spec­tive may be the key to unlock­ing greater returns.