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Learning the Importance of Patience in Investing

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November 04, 2013 – Comments (3) | RELATED TICKERS: NFLX , CMG , KO

I think one of the biggest mistakes individual investors can make is to get impatient with investments. Market swings, positive or negative, can do a lot to stir up emotions, cause unhelpful speculation, and lead to questionable and rushed decisions. Some of my greatest investing blunders, since I started investing nearly a decade ago, stemmed from a lack of patience and letting systemic factors, rather than the businesses themselves, dictate my investing decisions.

It is important to remember that the stock market’s performance has little, if any, tangible impact on the long-term operations and success (or lack thereof) of most businesses. For the most part, the stock market as a whole is simply a reflection of short-term speculations and reactions, from a variety of factors, captured in a consolidated venue. Many great businesses will get lost in the mix or grow to be underappreciated by the market, thus creating value plays where a quality business is trading at undervalued levels.

I write this because it does not take a whole lot to get swept up in the latest market hubbub, even when it realistically has little to do with the intrinsic value or performance of an individual business over the long run. Warren Buffett famously relayed these principles when he said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

Several times I lost focus after I started investing in 2005. I invested in companies I knew very little about (investing in Cutter & Buck, a golfing apparel business, was not my finest moment) and grew impatient within one or two years with certain investments, even if nothing had significantly changed with the businesses or their long-term outlooks. I sold Peet’s Coffee and Tea, Tata Motors, and other promising businesses often out of impatience. “Eh, the stock isn’t doing anything, might as well sell and move on to something else.”

Better yet, I sold portions of some of my more successful investments, including Netflix, Chipotle Mexican Grill, and Monster, usually only to invest in businesses that were not near the caliber of the ones I just sold. Perhaps my teenage tendencies for spontaneity got the best of me with my investments, but I believe these are some common occurrences that any investor in individual stocks is likely to experience at some point. It is a helpful item to learn sooner rather than later.

What is important to remember is the necessity to be patient with great businesses. Great businesses build value over time, creating and expanding a product or service that benefits customers, shareholders, and other stakeholders. This is not an instantaneous process, and does not do much good if it cannot be continued over a long period of time. The stock market tends to be a beast focused on short-term emotions and reactions, and market changes will not usually reflect the intrinsic value of a quality business with much accuracy.

One of the most impactful lessons for me has been to evaluate my own experience as a relatively novice long-term investor, and compare my strategy and actual decisions with the advice given by investing legends such as Warren Buffett and Peter Lynch. What is especially powerful is the revelation that there is something to the advice they give. Both Buffett and Lynch consistently reiterate that the core focus of an investor should be placed on the business, not the market. Invest as if the stock market will be closed for the next five years. Invest as if analyst projections did not actually mean very much because, in fact, they mean very little over the long-term (did analyst estimates, and market reactions, in 1952 influence the operational success of Coca-Cola?).

One of the greatest lessons from Peter Lynch comes from his simplest words of wisdom: “Time is on your side when you own shares of superior companies.” When you find a superior company, stick with it. It might take seven weeks or more than seven years for the market to recognize and more accurately reflect the intrinsic value of the business, but it will get there eventually.

Warren Buffett said he would much prefer to own a wonderful business at a fair price rather than a fair business at a wonderful price. I think there is something to that, and after reflecting on my experiences of the past decade, I can more fully appreciate the importance of applying those wise words to my individual investment portfolio going forward. A reasonable goal for individual investors is to truly learn from great investors, build discipline and practice patience with your investment portfolio, and sleep well at night knowing you are investing in some of the most capable and innovative minds in the business world. 

Best,
David K  

P.S. Join us at Pencils Palace!  

3 Comments – Post Your Own

#1) On November 04, 2013 at 2:28 PM, Mega (99.96) wrote:

Patience is not my strongest suit. I believe in "targeted impatience" - meaning you identify which things it is profitable to be patient about, and just as important which things it is unprofitable to patient about.

When you're sure you have a great company at a good price, of course it's a good idea to be patient. But those aren't always as easy to find as you might hope.

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#2) On November 04, 2013 at 3:09 PM, TMFPencils (99.80) wrote:

MegaShort - I'm certainly still working on my patience as well; it's easier said than practiced. It is important to stay diligent and not necessarily get attached to a business simply for the sake of the business. There is nothing guaranteeing that a quality business can't deteriorate into a mediocre business. The challenge (or the fun) is indeed trying to find great companies at good prices but, like you said, those aren't always the easiest finds. 

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#3) On November 05, 2013 at 8:43 AM, lemoneater (67.80) wrote:

Patience is a virtue, but lethargy is not!

When Amazon was $33 a share I told myself that I had plenty of time to enter a position if I wished later when I had some free cash. I saw it again at $60 and still didn't buy. Now at more than ten times the worth I would be late to the celebration unless it does a Google and tops $1000.

However, I've held on to a little TTM from @ $9 and a little ISRG from @ $99. I only have a few multibaggers. I seem to do best with stocks like XLNX and IMTKA which have doubled in share price and offer solid dividends which are very rewarding to one's patience :).  

 

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