In the previous blog post, we covered the significance of personal qualities and behaviors in investing. In this blog, we will delve into the importance of patience, a crucial personal quality required for successful long-term investing.
Hi, This is Venkatesh. I write on Personal Finance, Stock Investing, Productivity and Time Management. You will be interested to read more about me and the purpose of my website.
If you are interested in these topics do subscribe to my blogs. You would maximum receive 4 to 5 emails a month.
Do check the blog Index page for all my previous blogs.
One of the most crucial qualities an investor can possess is patience. In the world of investing, it is too easy to get caught up in the hype and the excitement of the market. Charlie Munger emphasises the importance of patience in 4 words, “Sit On Your Ass”.
Investing can be broken down into three distinct phases: buying, holding, and selling. Although patience is typically emphasized in the holding phase, it is often overlooked in the buying and selling phases. Nonetheless, patience is an essential quality that investors need to possess throughout all three phases of investing to achieve success. In the buying and selling phases, in particular, patience allows investors to avoid making impulsive decisions by reacting to short-term market fluctuations.
- During the ‘buy’ phase, patience can also help investors avoid buying stocks that are overpriced and wait for the right opportunity to invest.
- Similarly, during a market downturn, it is tempting to sell stocks out of fear or panic. However, patience helps investors avoid making hasty decisions that they might regret later.
We will discuss all three phases in detail.
Buy Phase
The “Fear of Missing Out” phenomenon can lead to hasty investment decisions, resulting in the inclusion of inappropriate stocks in a portfolio or buying good stocks at high valuations. As investing is a long-term process, it is critical to exercise patience. Investors should have faith that there would be multiple opportunities to buy stocks at initial prices (or even lower prices) during the holding period. Therefore, it is crucial for investors to exercise patience during the buying phase and wait for the right moment to make an investment.
What is the Solution?
In my earlier blog, I outlined a personal stock analysis framework that I use for investing. Once I come across a potential investment opportunity, I spend several weeks analyzing the stock and documenting my observations and assumptions in an investment thesis. Once the analysis is complete, I take a break of 10 days or 2 weeks before revisiting the thesis. This is a conscious effort to avoid being influenced by the stock price.
This enables me to avoid any emotional attachment to the stock and overlook any potential risks, high valuations, or unrealistic growth rates. After the cooling period, I revisit my thesis and examine it for any aggressive or conservative estimates that may have been influenced by my biases.
This cycle of conducting a thorough analysis and taking a break before revisiting my thesis typically takes between six to eight weeks from the initial idea to making an investment decision.
Holding Phase
Nonetheless, many investors find it difficult to hold a stock for an extended period of time. This is despite having a well-researched thesis or insights suggesting growth potential. Additionally, market sentiment related to global or national economic conditions, sector-specific issues, or temporary setbacks in the company can cause price fluctuations (in either direction) throughout the holding period. For instance, Nestle’s Maggi noodles episode a few years ago resulted in the product being temporarily off the shelves, and customers were hesitant to purchase it again. Therefore, during such times, an investor’s conviction in their analysis is put to the test, and it can be challenging to hold onto the stock with confidence.
However, patience is particularly crucial during stock-specific and general market downturns. It is during such times that investors may be tempted to sell their investments in a panic. Nevertheless, some of the most successful investors in history have been those who had the patience to stay invested even during the most challenging market conditions.
What is the Solution?
Till a few years ago, I to struggled with this challenge. There were two scenarios:
- Whenever a stock price rose dramatically, I was tempted to sell it for a quick profit and buy it back later at lower prices, only to realize that the stock price had risen even higher than my sell price. Although I had conducted a thorough analysis and the stock had a long-term growth prospect, my lack of patience caused me to sell it early.
- The same happened when there was negative news. I lacked conviction in my research, and could not bear the pain of seeing losses. This all led to selling my positions impulsively.
The Fundamental Truths
I handled these impulses by sticking to a few fundamental truths. When it comes to investing, there are certain fundamental truths that one must understand and acknowledge when it comes to investing. For example:
- I realized that trying to time the markets was not a successful strategy for me. Even if I occasionally succeed, it is unlikely that I could do so consistently. Therefore, I stopped making decisions based on short-term price fluctuations, especially when I was sitting on significant profits.
- Nevertheless, a decline in a stock’s price does not always indicate that my original analysis was incorrect. It’s possible that the stock is reacting to new developments within the company, which requires further analysis on my part to evaluate the impact on my investments and original thesis. For instance, the panic could be a temporary overreaction by the market, and the dip could actually present an opportunity to buy more of the stock instead of selling it. A thoughtful approach could turn an impulsive sell into a well-analyzed buy.
- It is important to acknowledge that stock markets and the prices of individual stocks are inherently volatile, and subject to frequent fluctuations. At times, the price movements could even be irrational and not reflect the true value of the underlying asset. The market may react impulsively to every news item that emerges, causing wild swings in stock prices.
Sell Phase
It is worth noting that selling a stock is a distinct activity from holding it (That we just discussed). Due to impatience in holding, you resort to selling. Yes, that is true. I still would see this ‘Sell’ as a distinct activity when compared to ‘holding’. Let me put it this way for better clarity.
Regardless of the holding period, selling should be approached with patience and careful analysis, rather than being driven solely by price action or emotions.
- You have held a stock for 5 years and have achieved 5x gains. You decide to sell (or)
- There is some disturbing news and you are not comfortable holding the stock further
In either case, the selling phase has to be approached with patience. It should be backed by sufficient analysis which assures that you are making the right decision.
What is the Solution?
When selling a stock, emotions can heavily influence the decision-making process. In one scenario, the excitement of 5x gains may lead to a hasty sale, while in another scenario, a price drop may trigger a desire to exit the position. In either case, you are away from making rational decision-making. To avoid making emotional decisions, it’s crucial to establish a sell strategy ahead of time.
One thing that has worked well is to have the sell decision/strategy much before and not when the time comes. One effective approach is to decide on “when to sell” or “what triggers a sell” at the same time as the decision to buy. How do I do it? As I mentioned that as part of the analysis I create an investment thesis. This would have a few strong reasons to buy the stock. Then it should have the contra information also. What should be the strong reason to sell the stock? These are what I see as “Sell Triggers”. I periodically update this list in light of new facts and realities in the industry. When multiple triggers become a reality, it is time for me to decide.
An Example
- Initially, your analysis predicted a growth rate of 15%, but in the future years, the company struggles for even 10%.
- The investment thesis for your buy is based on a growth rate of 15%, while the anti-thesis (i.e. Reason to sell) is a growth rate much lower than 15.
- The management itself is not confident due to the business environment, and regulation or competition/PE players.
- Before selling the stock, you assess whether the fall in growth rate is temporary or permanent.
- Based on the outcome of the assessment you sell the stock.
- Therefore, the decision to sell is made after conducting proper due diligence rather than hastily.
Most Important
Sell is a bigger and tougher decision than buying. Lack of patience in this phase can be costly, even if the investment idea is sound. Sometimes this one quality alone may help you to achieve financial freedom if the right stock is chosen.
To Conclude
Therefore, cultivating patience is crucial for investors who seek to create a successful, long-term stock portfolio. The ability to remain calm and objective in the face of market volatility is one of the key traits that separates successful investors from those who struggle. By taking a measured approach and not allowing ourselves to be swayed by short-term market trends, we can position ourselves for long-term success in the stock market.
Patience is often a key ingredient for successful stock picking. Identifying high-quality stocks that can deliver strong returns over the long run requires careful research and analysis, which takes time and patience. Rushing into investments without a solid understanding of the underlying factors that drive their performance is a recipe for disaster. By being patient and diligent in our research, we can increase our chances of identifying winning stocks and building a successful stock portfolio.
Hope you found this blog useful. Kindly share my blogs with your friends, peers and fellow investors.
