Play Dead

People often ask what the best strategy is for consistently beating the market over the long term. Our advice? Play dead!

Starting out in the world of investing can be overwhelming. There are so many books, websites, and gurus—all giving us different advice. Everyone has their own method, and of course they claim that theirs is better than the last.

So what is the best strategy?

You could spend a lifetime researching and backtesting investing methods and you still wouldn’t come to a conclusion. Moreover, historical performance is no signifier of future returns.

However, investor and author James O’Shaughnessy once told an anecdote that may have given the whole game away. He recalled how an employee who had recently joined from Fidelity Investments revealed the firm had conducted a study of their clients’ performance. The results showed the best-performing clients were dead.

That’s right! They’d died, their accounts had been frozen while the estate was being resolved. The beneficiary from the wills often just left the stock portfolio as-is for years to follow and, during that time, outperformed all other investors with complex strategies.

Dead people can’t make the mistakes that the average investor makes on a regular basis. Dead people can’t day trade or buy stocks with borrowed money. They can’t listen to the financial experts. They can’t get stock tips from online forums and invest in businesses they don’t understand. They don’t wear away at their returns by trading regularly.

But most importantly—dead people don’t panic!

They ignore all the noise on Wall Street and don’t sell at the first sign of a downturn. Dead people put their money in the market, and leave it there to compound and grow.

Obviously, this is problematic for several reasons. But don’t despair, there is another option.

The second best performers in the study were those who hadn’t died, but who had completely forgotten that they had an account to begin with. They’d opened one, invested some money in it, and then forgot about it.

That’s the less extreme version, and all things considered, appears to be the best all round… as long as you eventually remember to collect your returns.

Warren Buffett seems to support this approach too. In 1990, in a letter to shareholders, he remarked: “Lethargy, bordering on sloth, remains the cornerstone of our investment style”.

So why don’t all investors do this?

Firstly, no one ever talks about it. Have you ever heard a financial consultant go on television and say “You actually don’t need us guys. Just invest and forget about it”.

If that’s how you achieve marketing beating returns, and everyone knows this, who’s going to pay a financial advisor? Who’s going to watch the business channels, or read the Wall Street Journal, or log onto Bloomberg every day?

Secondly, I suspect that most people can’t believe that it’s so simple.

We’ve been told for years that Wall Street is complicated. We’ve been made to believe that all those six-figure salaries are justified because only the high performers can handle this stuff. However, most money managers can’t beat an index fund.

The great secret of Wall Street is that it’s not complicated. Peter Lynch, one of the best investors of our time, said: “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”

I firmly believe that. You can do better than all the experts by investing in great companies and forgetting about it.

In short, when you see bears, play dead.

2 responses to “Play Dead

  1. Excellent reminder, Emmet. My best investment returns have been from companies I’ve bought that are anchors to my portfolio. My high confidence, long term buys. Like Amazon, Facebook, MasterCard, Berkshire, etc. I love them because I don’t have to pay any attention to them. Benign neglect is what someone once called it and for these core holdings it’s the most comfortable and effective approach.

  2. I read an article about the Fidelity study awhile back. It made sense in principle but not in practice. A few months after reading the article my father stumbled on a forgotten account from my grandfather. He had passed ~10 years ago. The account was started many years prior to his passing – he might have even forgotten about It as well. It was a great surprise to everyone. This play dead idea now makes sense to me in practice.

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