“Patience Produce Uncommon Profits” – Why Patience in Investing is Vital
29 June 2020
Do you think that patience is short in supply in today’s fast-paced environment?
There is a lot of patience in investing quotes around. But patience when investing is still so underrated in today’s fast-paced environment.
Many people forget to put the word patience and investing together.
Being a patient investor is tough. Why?
1. Information moves so fast
2. It is easy to get information
3. People can easily share their views on how the market or a particular stock will move with the internet.
With the combination of these three things, we feel that we always need to respond to it. We don’t.
This article will serve as a reminder for us to have patience when we invest in businesses through the stock market.
“Patience can produce uncommon profits.” is a quote by an investing legend that is admired by Warren Buffett. His name is Philip L Carret.
Another investing great admired by Charlie Munger called Philip Fisher (also a huge proponent of patience in investing) says “I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.”
The most important thing we can learn from the above two quotes is that patience is indispensable to make big money.
However, being patient is not easy. Joel Greenblatt says it best when he says:
“The biggest challenge for investors is patience and that is in short supply. You used to get a quarterly statement and often throw it in the garbage; now you can check your stock price 30 times a minute. There’s a lot more data, a lot more ability to crunch numbers, and compare people. That works against investors, and patience continues to be the hardest challenge. It always was, but now it is even worse.”
Ease of information – good for investing? Bad for patience?
Now, we can get information easily at the palm of our hands.
Unfortunately, that is both a good and a bad thing.
The good is that we can make decisions easier and faster because we can get the data easier.
The bad is that we tend to be subconsciously affected by bad news or even analyst reports that say something that goes against our long-term thesis. Of course, it is important to recognize opposing views, but it is bad if we are emotionally affected and unable to act rationally because of it.
“At the beginning of the AGM of the Berkshire Hathaway Company they show this little video and each year Buffett is asked what’s the main difference between himself and the average investor, and he answers patience. And there is so little of it these days. Has anyone heard of getting rich slowly.” -Nicholas Sleep
Why Patience is Vital in Investing
A business takes time to grow and to recover.
Netflix was once a small-capitalization stock, now it is used by millions around the world. Small companies take years to be a big company.
Citibank was on the verge of collapse in the 2008 crisis, now it is doing much better. A company in trouble takes time to turn itself around.
Having an owner mentality means that we will grow together with the business.
How can we grow together with the business if we are trading in and out of the stock?
Also, it is impossible to predict what the market or the company will do this and the next quarter. Often time, they will surprise us. But if we are asked to predict what a company will be like years down the road, it is easier.
For example, if you ask me what Facebook will be doing two, three years down the road, I would say likely their focus would still be on digital advertising. And likely their market share would have improved further due to more migration of advertisement towards digital. But if you ask me whether their earnings and share price will be higher or lower one or two quarters from today, I do not know – and I will not bet my money on that outcome.
Is Patience Enough?
People often have the misconception that value investing is merely long term investing. That value investing is doing nothing for a very long period of time. Is that true?
That is true to a certain extent. If we want to have big money, patience is one of the key ingredients for it.
Another two key ingredients that many people forgot are the company analysis and valuation part.
Remember that above I mentioned that Philip Fisher says, “I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.”
He is absolutely spot on. But in order to do that, we need to buy the stock at an undervalued or fair valued price in the first place. And for that, we need to be fairly accurate at not just buying the right business but also at the right price. And know at what price when it is starting to get ridiculously high in relation to its future growth – then sell it for that big profits.
Therefore, patience alone is not enough; we need to understand the business well enough to know at what price is good enough for us to buy it. So in the future, we have a reasonable probability of selling them at big profits (because we know their fair and overvalued range in relation to the price we bought them at).
I think that Warren Buffett is able to be so rich because he does three things right:
- He knows what is a great business
- He knew at what price it is attractive
- He is patient when holding them
In my view, if we invest in a businesslike way with the proper framework and valuations, it is rare to get 3X, 4X, 5X return on our investment in stock investment within a short period of time.
It will take some time, it may be months or years, the market never ceases to surprise us. But the principles are clear, to make the big money, not only do we need to get our initial buying decision right (right management, right business, right price), we also need to sit on our ass and be patient.
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