From Taoism: The Little Known Powers of Doing Nothing

Jun 8, 2015

In our fast paced American go-go culture, inaction and passivity in dealing with all manner of enterprise, commerce, leadership and interpersonal relations is viewed as a Taoism-Wu-Wei-6.2015 path to failure; a weakness to be avoided at all costs. In most Western societies, proactive and assertive action in all endeavors is encouraged and seen as admirable, courageous, and is correlated with expectations of success.

But in Taoism, the ancient East Asian philosophical system, inaction can be seen as an ultimate power born of wisdom. In Taoism, the power of doing nothing is called “Wu-Wei” and is a part of the philosophical system described in the text of the Tao-Te-Ching. [1] The ancient text, attributed to Laozi, a Chinese Philosopher who lived in the 6th to 5th Century BCE [2] describes Wu-Wei as “action that does not involve struggle or excessive effort” [3] or put simply, being more passive than proactive. Wu-Wei implies that in many situations, being passive and doing nothing can be far more powerful and productive than acting rashly or too strongly, which can do one more damage than any good. 

We see this in financial markets all the time. Traders, hedge funds, institutions and private investors often cause themselves serious financial damage by overreacting to every headline, rumor, trend or fad.

Investment results of passive portfolios can often outperform active strategies, but the prevailing psychology of modern trading cultures values activity and even hyperactivity far more than passivity, as if there is no question which is the more valuable. But this is clearly not the case. For example, in 2013, the S&P 500 Index gained over 30% in value, while many fast money hedge funds and other highly proactive asset managers made much smaller gains. A passive position in an S&P 500 index fund or ETF  required no action whatever, but vastly outperformed most active portfolios. This was not an unusual result; passive buy and hold portfolios often outperform hyperactive traders.  

Another very common example of the advantages of Wu-Wei in financial markets is an habitual over-activity when managing certain investments that do not initially act as we wish them to. Assume you buy a stock that has good fundamentals and a good underlying business. It’s revenues, earnings management and prospects are generally strong, but because of news headlines, analyst reports, media gibberish or for no reason at all, the stock temporarily drops in value. Many holders of the asset will panic, selling it too quickly and locking in a loss, as any kind of action is seen as better than inaction. Some time afterward, the stock rises to new heights and realizes its full value, while the over active investor fumes. Cool-headed inaction would have been a much better course in such a situation.

Passive non-action can be quite powerful in many other ways. Taoist Wu-Wei-ism can be the best choice in certain interpersonal interactions, business negotiations and family relations. Sometimes doing nothing and in particular saying nothing is the best course of action. But, in our “don’t just sit there do something!” society, we feel obliged to take some sort of proactive and even aggressive action often for no other reason than to avoid passivity and inaction.  This deeply imbedded cultural reflex can lead to any number of adverse outcomes, resulting in financial, emotional or material damage that could have been avoided if only nothing had been done. 

Adopting a Wu-Wei policy of inaction in certain situations may clearly be the best choice, but it requires a uncomfortable disconnect from the habits our societal norms. We are hard-wired by our go-go society to feel a certain anxiety if we do nothing while confronted with a difficult task or some adversity. Resisting the urge to overreact can prove quite a challenge.

[1,2,3] Wikipedia: Taoism, Wu-Wei