How many times have you experienced something that scared or upset you, and that caused you to do something that ultimately made the situation worse?

In an article I read this week, famous investor Ric Edelman talked about people having a bias toward action. He said that most of the time, taking action instead of doing nothing was the wrong choice.

The example he gave was a scientific study of soccer goalies during penalty kicks. The shocking statistic that stuck out to me is that a goalie only stayed in the center of the goal 6% of the time – nearly always jumping left or right in anticipation of the kick. But 29% of penalty kicks were aimed at the center of the goal!

Now, I am not a soccer goalie, so that particular statistic doesn’t help in my day to day world of advising business owners. But I did start to wonder if that concept held true for my clients’ businesses as well. As it turns out, there are three different scenarios in finance and business ownership when doing nothing is often your best course of action.

1. The Revenue Scenario
The first thing I thought of when looking at this phenomenon is how we actually run our businesses, especially when the focus of the business is to rapidly increase revenue. If you are trying to raise profits/revenue, some of the first actions suggested are:

    1. Reducing prices to increase sales
    2. Vastly increasing inventory and marketing a new release (i.e., betting on a new release)
    3. Expanding the business itself to achieve economies of scale

But there are problems with each approach. If you reduce prices, your profit margins will be thinner on each product you sell. Sales will need to increase exponentially in order for you to break even.

Over-stocking inventory and betting a new product will take off is simply a dangerous gamble. You are placing all of your eggs in one basket, and desperately hoping someone is there to buy them.

Business expansion and growth always produces headaches or unforeseen circumstances that need to be addressed. Expanding before you are actually ready further exacerbates the situation. Are you truly set up to be scalable? Or will expansion just lead to more complexity without benefit? My personal philosophy is “Don’t expand until it hurts.”

In all of these examples, patience and trusting the data/numbers you collect will usually beat any action you attempt to take to force a sale and/or increase profit.

2. The Investment Scenario
The next scenario involves handling of your business and personal investments. Buy and hold has historically been a good investment philosophy. My personal philosophy is “buy and hold with a twist”. This means that one should buy good companies that are temporarily mispriced, and hold them for the long-term (value investing). The largest enemy to this philosophy is trading every time the market goes up or down.

When people get itchy trading fingers, I remind them that most of the losses during the Great Recession were made up in 18 months. That means that if had you done nothing, the majority of your money would have recovered in less than 2 years. This is assuming an all-stock portfolio. If you had a diversified portfolio with bond and cash positions, some of the temporary losses could have been mitigated even further.

3.The Vacation Scenario
For our last scenario, I want to discuss vacations. Have you ever been exhausted when you return from a well-deserved vacation? Me too!

We take vacations so we can relax and get away. If you don’t feel rejuvenated from a vacation, then it means you did too much during your week off. In other words, you took too many actions while on vacation. Vacations are meant to be fun, but setting aside time for you to do nothing, or at least nothing important, is necessary as well.

So, the next time something gets your anxiety up and you start to feel the compulsion to “Do something!”, remember these scenarios and ask yourself if taking action will help, or if it might be better to do nothing at all.