On doing nothing

by Manshu on October 18, 2013

in Uncategorized

The US government shutdown has finally ended and it was interesting to see that the S&P 500 was actually up by about 3% in October which roughly overlaps the time this circus lasted.

I was watching these events closely from an investment perspective because I have a lot more money invested in the American markets right now than I have in India. That these events didn’t affect the stock market isn’t that big a deal, but I was surprised to see that the market actually went up by 3%.

Ignoring this event and doing nothing would have been the best bet as far as I am concerned, and this is what I did. However, this made me wonder what would have happened if I hadn’t done anything at all this year?

My portfolio is down 1.5% for the year, and the S&P is up about 20% for the year so I have obviously done quite badly. It is just a small consolation that I was up 60% last year when the S&P was up about 13%.

All of my losses stem from Put options, and a simple calculation showed that I would have been up about 20% had I not traded in any Options at all.

Next, I looked at the three sales I made during the year, and found that had I continued to hold on to those shares, they would have added two percentage points to my gains. So, in all, if I hadn’t done anything I would have been up about 22% for the year.

Now, hindsight is a wonderful thing, but what lessons can I learn from this that can be practically applied.

Since I do use some sort of valuation when I buy a share – I only sell them when they seem overpriced, and in these cases it did feel that the shares were overpriced. The market says I’m wrong, but only by a little and I can live with that.

The Put Options are more interesting to me because of the allure they hold. It is easy to make money when the market is up, and everyone is doing it anyway, but making money when the market is down is far more sexier and holds a lot more appeal than going long.

It is as if the money you make by going short is more valuable than the money you make by being long and I would say that the good feeling that comes along with it certainly makes it feel like it.

The great difficulty in this is that not only do you have to be right about price, you have to be right about timing, and it is entirely useless if you get just one out of the two.

Now, the other aspect of doing nothing is not buying. I have not been buying as much as I did when there is panic in the markets and I think by and large time will show that it is the right strategy. However not doing anything is much harder than it actually sounds.

I get tempted by a new share every other week but I just bite my lip and wait. I have not completely stopped buying to hedge against the scenario where I am wrong and the markets rise a lot more before they fall.

This past year has taught me to not seek the excitement of shorts and continue to restrain myself when shares present them to me in seemingly comfortable markets because I’m sure deals will present themselves later. There is a lot of value in doing nothing, the hard part is to recognize this and then being patient about it.

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