Just about all of the great investors are very plain spoken in terms of explaining important and potentially complicated investing concepts. Yahoo Finance posted a list of nuggets from Warren Buffett and I wanted to address one them that I've touched on many times before.

  • "Passive investing will make you more money than active trading."

Tackling this head on is less interesting than an underlying point of understanding about long term, like accumulation for retirement and then living in retirement, participation in capital markets. You've probably heard that the stock market has an average annual return of 10% or maybe 8% or something similar depending on the period studied. That average annual return includes all the great years, the crises and everything in between; 10%.

This is unlikely to change in the future, at least it is unlikely to change meaningfully. If you don't believe that then you probably should not invest in US equities. The thing we don't know is what the sequence of returns will be going forward. In the next 20 years we could have a couple of crises that cut the market in half, or have very low volatility and little excitement or any other scenario but as Dennis Gartman might say, it is a good bet that stocks continue to move from the lower left to the upper right with the occasional bear market along the way. The next bear market or crisis won't be different. The market will go down a lot, scare the hell out of a lot of people and then go on to make a new high. It happened after the tech wreck, it happened after the Great Financial Crisis and it will happen after the next one, the only variable is how long it will take to play out.

Once you can accept this as being true which may not be easy, then the next step is to realize that what is more important than your investment returns is your savings rate, maintaining a suitable asset allocation, your willingness to live below your means and the ability to avoid self-destructive behaviors like panic selling after a large decline or being too greedy like putting half your money into Bitcoin or a lottery ticket biotech stock.

If you can do those four things and you never place a trade then even with the ups and downs then you are very likely to have enough money for your goal, presumably retirement. That is what I take from Buffett's point above and it is a crucial point of understanding. The market's average return can be enough to get the job done without doing anything else.

Once this is understood it can do wonders for an investing strategy. The most important thing for a retiree in this context is whether they enough for the lifestyle they reasonably hoped to have. If someone thought they needed $900,000 and they have $850,000, they're probably in good shape as opposed to thinking you need $900,000 and only having $275,000.

When you're 71, and no matter whether you have $850,000 or $275,000 you won't think back to the second quarter of the year you were 49 and lament a bad trade or celebrate a good trade because that simply doesn't matter. Once you can accept that it should reduce you account activity which tends to be better for long term results.

It's not that every so often a stock or fund shouldn't be sold or a new theme added, I do both and believe in defensive action when the market warns of a large decline but a lot of trading will most likely be a net negative.