The art of doing nothing

Alligators are the best resource allocators. They are ambush predators. This means they wait patiently for the right moment rather than vehemently pursuing their prey. In other words, the gator devotes its energy when the odds are skewed in its favor.

Think of alligators as masters of tactical inaction, an essential skill for all market participants. However, inactivity is counterintuitive in a world where everyone is obsessed with being busy and follows the mantra that business equals success.

Markets do not care how busy we are. They do not reward the most laborious players. The trick is to execute enough trades, not less or more. What defines those limits? It is the strategy we use. So, overtrading will look different for day traders and, in another way, for mid-term investors.

The most difficult of the three plus-one steps—waiting, buying, waiting, selling—is to sit and do nothing. I already discussed how to manage losers and winners. It is time to dissect how to master inactivity.

Information overload and FOMO syndrome

Spare cash in our brokerage account craves to be invested. Moreover, the financial media takes care of that, delivering an endless flow of (deceptively) tempting ideas. We want uranium, AI, Brazil, silver, tankers, bitcoin…we want everything, or at least to not miss anything. Countering the urge to be reactive is, at least to say, challenging.

In our age, we are inundated with mind-boggling amounts of information. That, combined with our inability to filter it, makes us overfed consumers of distractions, craving for the next dopamine shot.

Think about how many gigabytes we devour daily. Every bit of data is an external stimulus that provokes us to do things that are not in accordance with our original plans. It sounds too esoteric, but I do not think so.

Ask any marketing professional. A successful campaign is based on precisely those weaknesses. The ad delicately pulls the emotional levers to induce action. We end up buying things we don't need just because we've been exposed to the campaign long enough.

What does all this have to do with investing?

Finding Alpha ideas is not that complicated. However, we often fail to execute, i.e., to harvest the Alpha we found. One prime reason is our inability to stay idle. Hence, it does not matter how profitable our strategy is if we cannot stick to it. Doing nothing is vital in investing and integral to every prudent investing plan. In summary:

My investment strategy should be in sync with the market, and I should be in sync with my strategy.

Part of our investing strategy is the assets and tools we use. And here comes the circle of competence, which is overrated. It emphasizes the importance of research while neglecting execution (risk management).

I agree that to create a comprehensive analysis, we need a profound understanding of the company and its industry. However, this is far from enough to end up with profitable trades. The missing component is risk management. That being said, the principles of risk management are the same regardless of the industries we are interested in. Positions in Nvidia, Barrick, or Nu Bank still need the basics: timing, position management (stop loss, take profit), and position sizing.

Simply put, research is overprized at the expense of execution. Then, we wonder why we fail even if our analysis is directionally correct. I will repeat myself: I prefer to be a good enough analyst and excellent risk manager than a brilliant analyst and mediocre risk manager.

Nonetheless, we can't understand everything, and not everything fits us—crypto, real estate, gold, bonds, swing trading, macro trading, value investing, scalping, etc. Despite that, we crave every shiny object, terrified of the opportunity of missing out. The information flow worsens the situation, relentlessly feeding us new ideas.

Let's look at a few examples. They are intended to show how the flow of information constantly triggers us.

• Media ABC says we're in a bull market led by the AI industry. The trigger is information about the new bull market (not the market itself; there's a vast difference) that leads us to act accordingly. Then, we buy Nvidia and AMD.
• After two days, Expert XYZ says we are entering a secular bull market in uranium. Then, another trigger, and we hop on the uranium train, buying Cameco.
• A week later, a TV anchor says shares of companies running oil rigs have risen 15% in just one week and are expected to rise even more. Again, the same story. We reactively buy Transocean and Valaris in a hurry.

We are sold. We have uranium, AI, and oil rigs. Eventually, we achieve inner peace…until we hear for Brazil and Argentina. FOMO mode is on. We desperately need exposure to LatAm. Therefore, we trim our current positions to accommodate the new shiny objects.

I am not saying any of the themes are terrible investments. The point is to illustrate that we are wired to blindly chase the next hot idea, regardless of whether it fits our strategy. The outcome is a mindless buy-and-sell spree, resulting in unhealthy asset turnover and long-term malperformance. Put another way, we are trapped in overtrading/overinvesting.

To emphasize, I am not talking about the absolute number of transactions per period (day, month, year). Based on our strategy, we define the number of expected trades for a certain period. It is usual for a swing trader to make 10-15 trades per month, but making that many per day is overtrading. For a day trader, 10-15 trades per day is often the lower limit. As you can see, context is a determinant. Without it, the absolute number of trades means nothing.

No matter the approach we use, great trades are rare:

• Quality technical setups are rare. This means setups with solid momentum, rising volatility, and an approaching phase transition from imbalance to balance.
• It is tough to find a solid company in a thriving industry with robust tailwinds and catalytic events on the horizon.
• In summary, out of 100 price action setups or 100 companies, less than 5% will be worth entering a position. The other 95% range between mediocre, awful, and abysmal, i.e., not worth our money.

The cycle is simple: analyze, reject, analyze, reject, analyze, reject, and so on until we find our setup or company. Only then do we act. Trade quality is inversely proportional to the number of trades we make.

Final thoughts

An investing process can be described as prolonged inaction followed by intense action. Then, drink, rinse, and repeat. Therefore, If we are bored when investing, we are on the right path. But how do we stay unexcited with so many luring distractions around us?

Our ability to wait is a function of information diet quality. I can not stress this enough. We are dopamine junkies, consuming carelessly distractions kindly delivered by the dopamine industrial complex.

Art became entertainment. Entertainment became a distraction. Distraction became an addiction.

Triggers are everywhere, and resisting seems impossible. This makes waiting so strenuous. The tsunami of distractions dressed as information amplifies our inability to stay consciously inactive. Reflect on how many trades were provoked by scrolling in Fintwit or another media platform. I have been there and know what it means to crave the next dopamine shot, pursuing the new “best” pick.

To make things worse, dopamine alters our perception of time. The more distractions we consume, the faster time flies. Hence, we are always in a hurry to avoid missing the next big winner.

Then, how to master tactical inaction?

Slash 90% of the information sources. Probably even more. Then, impulsivity to chase every new thing will diminish, and clarity will eventually replace mental chaos. The ultimate outcome is less overtrading, followed by less, yet high-quality trades.

Be like alligator, the grand master of resource allocation.

Every quarter, I dissect my investing themes for the present year. I start with the big picture (macro and geopolitics), then move to industry/region specifics, and eventually discuss the most enticing companies.

My goal is to help institutional investors make better decisions about obscure industries and regions. How do I achieve that goal?

By delivering comprehensive and, most importantly, actionable reports.

If you wish a sample report, feel free to contact me by DM.