I’m sure you’ve heard the oft-repeated phrases about patience – “Patience is a virtue” and “Good things come to those who wait”.
What’s equally true is their opposite – Impatience tends to breed mistakes, loss and unnecessary cost.
Get in a hurry on the freeway and you’re likely to get a ticket or worse an accident. Rush into buying a house and you may pay too much.
The same idea can be applied to investments.
Which brings me to this question…
Who’s your best friend in stock investing?
Is it your broker? Nope.
The Federal Reserve? Nah.
Politicians? Hell no.
You’re very best friend in investing is….time.
That’s right. Contrary to what a lot of talking heads on TV will say, it is time, not timing, that is the key to investing success.
Over the long term, share prices tend to reflect the underlying value of companies and the returns they deliver to shareholders. But over shorter periods, stock markets are rarely smooth and investors can experience extreme turbulence brought on by catastrophic events or just plain old erratic investor behavior. Equity markets can overreact to new developments with unpredictable, and sharp, falls and gains in share prices. Trying to time those short-term moves is a dangerous and potentially expensive game.
But you wouldn’t know it based on what most investors do…
Millions of investors put their hard-earned money in the market each day with timing as their strategy. They invest like a Las Vegas gambler, with only enough patience for one turn of the wheel. Indeed, the average holding period for a stock on the NYSE is about 1 year. Is it any wonder that that average stock investor’s returns are a paltry 2-3%? That doesn’t even beat inflation!
From what I see, many market timers are doing what I call “catch-up” investing. They’ve done the math and are just realizing that they’re not going to be able to retire early, if at all. So, they want to “compress time” by shooting for some magical return that will shore-up the gap in their retirement funds.
When they look at the market’s average return of 10% (per year, over decades), it looks like a turtle to them. They need 20, 30 or even 50% returns in a few years. They need a rabbit…so they think. So, they start investing in high-risk stocks with goal of turning a quick buck. The vast majority fail. Unfortunately, most wind-up just giving their money to a long-term investor in the end.
Here’s what Buffett had to say about this…
“The stock market is designed to transfer money from the active to the patient.”
My friends, patience, in the stock market, is golden.
History has shown that investors that take a long-term view towards their investments have earned good returns, well above inflation. However, that same history shows us that the investor who attempted to time the markets, typically miss the ‘best days’, and because markets can move sharply over the short term, those days can be very important. They can make all the difference between getting a 3% return and a 10% return.
Although stock markets are prone to volatility, markets and wider economies have a tendency to rise over time. This applies to everything from share prices and earnings to wages and the price of household goods.
Successful investing requires patience and taking a long-term view. When making investment decisions it’s best to ignore short-term ‘market noise’. Instead, focus on the fundamentals of quality companies and changes in value in the businesses you hold – these are the key drivers of long-term returns.
On the other hand, short-term returns are driven primarily by changes in investor emotions – something impossible to predict. Therefore, trying to time the markets usually means locking in losses and missing out on gains.
Trading activity is the enemy of investment returns. Constantly buying and selling stocks eats away at returns in the form of taxes and trading commissions. Instead, we are generally better off to follow the adage of “buy right and sit tight.”
Be patient with your investments. Give them time to make you the profit you desire. A good move in the market takes time to develop. Quality businesses earn high returns and increase in value over time. Fundamentals can take years to impact a stock’s price, and only patient investors are rewarded.
Investing in the stock market is not a path to get rich quickly. It’s not meant to be exciting either.
Here’s Buffett again on this….
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – Warren Buffett
If anything, I believe the stock market is best meant to moderately grow existing capital over long periods of time.
After all, the goal is to find quality businesses that will compound in value over the course of many years. If we get this right, your portfolio’s return will take care of itself. And when portfolios take care of themselves they care of their owners. That allows the owners to live the good life – the financially free life.
Be free. Nothing else is worth it.
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