“One has to wait without impatience for what should come, and yet at the same time do everything within one’s power as though one were impatient and as though one were solely responsible.”
It’s an age old adage that patience is a virtue. When it comes to investing, it isn’t only a virtue; it can also make or break your success in the stock market. Impatience is quickly becoming a national phenomenon and part of our everyday life.
If you think about it for a second, we complain about everything and it usually stems from our impatience. There are a number of reasons for the accelerated impatience in our society: technology, consumerism and just plain ole capitalism.
Whatever the reasons, we must learn to control it to some degree.
We have all seen it before, and maybe done it ourselves. How about that person that complains at the airline ticket counter for the plane not taking off on time? Or the person that complains about the Wi-Fi not working mid-flight? Or the person that can’t recline their seat enough? They act as if their life is over…
These are things, especially Wi-Fi on an airplane, that are modern marvels and relatively new to our civilization. However, for some reason we think we deserve to have them this instant, and if we don’t get them we become emotional, impatient and sometimes even throw temper tantrums. I think impatience can be a great thing if used correctly. It can help one get things done quicker than the average person. However, when it comes to investing…patience is the name of the game.
Check out a hilarious video here.
In investing, impatience can be boiled down to Two Main Characteristics:
I will use Microsoft as a case study on the importance of patience.
Waiting For A Margin of Safety
Microsoft rode the gravy train during the tech boom and by the end of the party, the stock was trading at some pretty lofty valuation levels. It also reached the $500 Billion market cap number for the first time and was trading at well over 50x earnings at its peak (as seen in the graph below).
Successful investors don’t get stressed when their best investment ideas rise to astronomical levels or begin to drop. Instead they sit back and wait for a big enough margin of safety and invest…or invest more!
In the case of Microsoft you can see it would have been prudent to sell some shares during the extremely high valuation levels.
You must learn to be patient because even the most successful businesses will fall over time. With these high valuation levels you never really give yourself an adequate margin of safety. For these reasons, you have to avoid the mindset flaw of impatience if you want to find success in investing.
As another example, Coca Cola has fallen 25% or more 5 times since 1995. It did this while growing revenues and cash flows consistently over time. And Coca-Cola is just one example. There are countless others.
Yes, you heard that right. Great investing includes the bad years, as well as the good. Warren Buffet’s partner, Charlie Munger, lagged the S&P 500 29% of the time, yet he is one of the greatest investors of our generation.
In a study by Davis Advisors, they found that over a 10-year period, you would see the best investment advisors to be ranked among the worst about one-third of the time.
Impatient investors don’t stand a chance.
Many investors didn’t realize it at the time, however, the excessive valuation of Microsoft sowed the seeds of future investor returns.
The business was great…however the stock was priced to perfection. It would have been very difficult to reap out-sized investment returns if you invested in Microsoft during the irrational exuberance times of 1999-2000. My recommendation is to make a watch-list of your best ideas, and wait for the right time to buy.
Holding Onto Great Businesses
If you purchased Microsoft at great valuations, when the stock was trading at less than 10x earnings you had a significant margin of safety. And you were also buying when others had given up on the business and the stock completely (see graph below).
It is easy to see why trading activity in the Stock Market has picked up so much over the years: Fear, Leverage, Technology…
Whatever the reason, in order to beat the Stock Market, you can’t play the Stock Market’s game. It wants you to actively traded stocks. It wants you to fail. The stock market will unleash pain to most people the majority of the time. It wants you to be impatient.
When you look at it from an overall portfolio perspective, you can see why some people can become impatient. The typical value investing portfolio rises slowly over time.
For example, let’s say you have an average annualized gain of 12%. I will tell you right now that it will never be linear or in a straight line. There will be some months when you will be down and there will be some months when you make less than 1%. You may even be down some months. This is totally normal.
Investment results don’t just appear out of thin air. It takes hard work and the proper temperament of patience to hold onto an investment that doesn’t change fundamentally…but changes in price.
New investors often romanticize the buying and trading of stocks as a way to get rich quickly, and while there are times that these methods can pay off, they often don’t reach comparable financial benefits to those portfolios that hold strong to their investments over the long term.
Here’s a little secret though — You don’t make money by actively buying and selling securities; you make money on your investments by holding over the long term.
If you’ve chosen wisely and have the patience to watch your investments come to fruition, you don’t need every single investment you make to pay off big year after year. All it takes are a few big winners over the years to take your portfolio to enormous heights.
Knowing this might not always make it easier to take a big loss, but it should stop the feeling of devastation if you know that the underlying business is still a high quality business.
You must have the patience to sit-back and watch a few great stocks make it really big over the long-term. This is where the bulk of your returns will come from. Speculator and traders will jump in and out of the stock market and they won’t see near the same profits of holding for the long-term.
Average Holding period of investors…?
The world we know today has never seen the incredible speed in which information flows. As a result, this information has given investors reason to believe that every data point matters just because it is now available to them at lightening quick speed.
According to data by the NYSE, the average holding period for stocks is now less than 6 months!
Remember…holding stocks for 6 months is speculating or trading…NOT investing.
It is very interesting that the financial market, as a whole, has taken such a short term stance towards the stock market.
It is a disconcerting trend for anyone trying to compound their wealth over the long-term, however it provides tremendous opportunity for us as long-term value investors.
For example, Warren Buffett said his ultimate holding period is forever. This is not by coincidence. He is a long-term compounder of wealth that understands the power of compounding. It is no fluke he has produced the incredible results he has over such a long period of time.
This trend of active trading in and out of stocks is a significant hurdle for investors if they partake in this kind of activity. Increased trading increases commission costs and over time can be a drag on compounding wealth because of the costs and short-term taxes that will be levied on you by selling securities actively.
We Over-Complicate A Simple Concept…
According to the Quantitative Analysis of Investor Behavior report from Dalbar, equity fund investors have earned an average annual return of 3.69% for the last 30 years through 2013. In contrast, the S&P 500 returned 11.11% during the same period.
One of the main factors for this massive under-performance is impatience. Humans are emotional creatures. We have pre-built bias coded into our genetics and it actually works against wealth creation.
Investors constantly hurt their future wealth generation by actively buying and selling securities. Usually chasing hot stocks and funds or pulling out their money during down markets (which should be the time to buy).
In one study, 8,859 participants in a mandatory retirement contribution program were asked to fill out a questionnaire.
They were told they could turn in their questionnaires immediately and receive a gift card for $8, or they could return the questionnaire later and receive a $10 gift card.
Half the participants submitted their questionnaires immediately. The other half indicated they would submit it later and receive the $10 (although only two-thirds of those actually ended up submitting it).
Not only are people incredibly impatient, but hen they do display signs of patience they rarely follow through with it.
Sounds a lot like investing!
Wait for the perfect pitch. You don’t need to swing for the sake of swinging. Action doesn’t mean you are being smart or productive.
Be careful investing with funds or fund managers with high turnover in security holdings. They aren’t investing; they are speculating.
Patience is not always a trait you are born with, it can be learned and you can train yourself to be aware of your impatience and choose not to succumb to it.
Even with the ‘what have you done for me lately’ mentality of investors and the stock market, valuation will always matter.
The broad market’s impatience gives people like us the edge we seek as value investors to gain outsized returns over the long-term.
Who knows, you might be waiting to buy the next Microsoft.
Davis Funds. The Successful Investor: Mastering Investor Behavior That Build Long-term Wealth. http://dstfinancialservices.com/files/2012/01/The-Successful-Investor.pdf . p. 5.
Hastings, Justine and Mitchell, Olivia S. How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors. National Bureau of Economic Research Working Paper No. 16740. January 2011.
King, Michael. Study: Investors Are Dumb. http://www.moneynews.com/investinganalysis/dalbar-investor-behavior-return/2014/05/12/id/570820/