Investing – What We Can Learn from Chinese Philosophers and Warren Buffett

Greg Addison | 7-24-2018

Recently, I read an article penned by Jim Parker, a Vice President at Dimensional Fund Advisors. The article resonated with me as it points out one self-destructive behavior in which I see many investors engage while also suggesting a more productive approach.

  

How Taoism Can Effect Investment Strategies

In the Chinese philosophy of Taoism, reputedly founded by philosopher Lao Tzu, there is a saying: “wei wu-wei.”  In English, this translates as “do without doing.” It means that in some areas of life (hint – think investing) greater activity does not necessarily translate into better results. 

In Taoism, students are taught to let go of things they cannot control. For example, when you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you let the tree grow – trying to manage it every day isn’t helpful. 

Of course, this doesn’t mean that we should always do nothing. In fact, one of the precepts of the financial science approach to investing suggests you should direct your investment efforts to the things you can control. These include incorporating your own preferences and sensitivities when choosing investment strategies, diversifying your allocations to moderate the ups and downs, being mindful of the impact of fees, and exercising discipline when emotions threaten to blow you off course.

 

Re-Balancing is Key

Successful investing requires taking actions that can have a positive impact on the outcome. For instance, to maintain their desired asset allocation, investors should regularly re-balance their portfolio by reallocating money away from strongly performing assets. However, re-balancing is a disciplined, premeditated activity based on each person’s circumstances. Contrast re-balancing (a disciplined approach based on thoughtful asset allocation models) to the “busyness” of impulsively following investment trends and chasing past returns promoted through financial media. Look at the person who fitfully watches business TV or who sits up at night researching stock tips. That sort of activity is likely counter-productive and can add cost without any associated benefit. With investing, constantly tinkering with an allocation does not perfectly correlate with success.

Now, while that makes sense, many people struggle to apply those principles because the media tends to look at investing through a different lens, focusing on today’s news, which is already priced into the market prices, or on speculating about tomorrow. While trying to outguess the market can be stimulating, is it relevant to your long-term plan? Multiple research projects suggest the answer is a resounding NO! To again quote Taoism, it is not “do without doing.”

 

The Tao of Warren Buffett

People caught up in the day-to-day may constantly switch money managers based on past performance, or respond in a knee-jerk way to a media broadcast that turns out to be noise or “filler” for that day’s news show. Again, the assumption underlying these approaches is that if you put more effort into the external factors and adjust your position constantly, you will get better results. Unfortunately, people may end up earning poorer long-term returns from trading too frequently, chasing past performers, or attempting to time the market. Ultimately, that’s just another reminder of the potential benefits available to disciplined investors who stay focused on what they can control and avoid exerting energy and money into trying to control what they cannot. 

Taoism’s Lao Tzu also has another quote worth mentioning: “By letting it go, it all gets done. The world is won by those who let it go. But when you try and try, the world is beyond the winning.”

Maybe Chinese philosophers are not your cup of tea. But what about Warren Buffet, often acknowledged as one of the world’s smartest investors? Here’s what he has to say:

“Doing nothing is often the right thing to do. You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”

 

Questions? You can reach Greg Addison at
1 (800) 821-7715 x142, or via e-mail at gaddison@lewer.com 

 


Lewer Financial Advisors, LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for general information purposes only, and is not intended to provide, and should not be relied on for tax advice, legal advice or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Lewer Financial Advisors is a multi-state registered investment advisor domiciled in Missouri.   
Lewer Financial Advisors is a member of the Lewer group of companies.
Greg Addison

Author: Greg Addison

Greg Addison is the Senior Vice President of Lewer Financial Services, LLC. Lewer Financial Advisors is a corporate Registered Investment Advisor, specializing in both personal wealth management and institutional retirement plan consulting for the individual investors, business owners, dealers, retailers, and franchisees who know The Lewer Companies well.