Let the Tool Do the Work

One of my summer jobs during college was to help build and repair pool filtration systems, which naturally required a good amount of sawing PVC pipes.

On my first day on the job, I put every ounce of strength I had into sawing a length of pipe and ended up making some bad cuts with uneven ends.

Thankfully my boss was a patient man. After watching me force each push and pull of the saw, he said to me, "You know why you made a bad cut? You didn't let the tool do the work. Take it nice and easy and let the tool do the work."

This advice popped into my mind after reading an article about increased trading activity among retail investors. After five-plus years of a fairly strong market, more investors seem to be willing new gains through speculation rather than waiting for them through investment.

They're not letting the tool -- that is, the business -- do the work.

Trying to time trades and generate returns through speculation might work in the short-run now and then, but it is a wholly inferior long-term strategy, particularly after taxes and transaction costs are considered.

Over the long-term, the vast majority of investment returns are driven by dividends and earnings growth, which result from business performance, not market speculation.

As Vanguard founder Jack Bogle wrote in Enough:

Investing is all about the long-term ownership of businesses. Business focuses on the gradual accumulation of intrinsic value, derived from the ability of our publicly owned corporations to produce the goods and services that our consumers and savers demand, to compete effectively, to thrive on entrepreneurship, and to capitalize on change.

Or as Buffett wrote in his 1996 letter to Berkshire shareholders:

Over time, the aggregate gains made by Berkshire shareholders must of necessity match the business gains of the company. 

As we discussed in this post, long-term investing success boils down to a simple formula:

Investment + good company + right price + patience

After you've done your research and bought a stock at what you consider to be a good-to-fair price, be patient and let the business do the work. The investment returns will follow. 

Good reads this week:

• Is investing really a game of chance? - BBC Business
• Corporate governance according to Charlie Munger - Stanford Business
• Valuing growth stocks is hard - Monevator
• Pattern recognition - A Wealth of Common Sense
• Retired teacher made £1.1 million in the market and left it to charity - Telegraph

Quote of the week

The best thing a human being can do is to help another human being know more. - C. Munger

Stay patient, stay focused.

Best,

Todd
@toddwenning on Twitter