Five Virtues of a Wise Investor – Investor Virtue #4: Patience
Of the five investing virtues I discuss, patience may be one of the hardest ones for many people to embrace. The bottom line is that investing is never about instant gratification. However, many people wish it were.
Whenever I talk about the importance of being a patient investor, I revisit the famous Marshmallow Experiment. In that famous 1960s-‘70s Stanford University study, psychologists tested the ability of young children to delay gratification. In short, preschoolers could immediately eat one marshmallow (or another sweet treat), or wait awhile to earn two treats.
It turned out that the kids who were patient enough to earn two marshmallows exhibited helpful self-control in many parts of their lives as they became adults.
Patient investors take the long view
Having patience as an investor is quite similar to having the ability to wait for two marshmallows. You may have to choose to give up some immediately gratifying things, like owning the hot stock that is supposed to rocket upward in favor of owning good bargains that may take a whole decade to mature. Just ask anyone who lived through the dot.com era of the late ‘90s about their experiences.
As I mentioned in my blog about the virtue of thrift, you need patience because most investing strategies take time to pay off.
Here’s a good example from the corporate world. According to a 2008 study by Goyal and Wahal, when large corporations replace their pension fund managers, the fired managers tend to outperform the hired managers on average by 0.95% annually. The study ran eight years (1/1/96-12/31/03) and measured 660 round-trip decisions. Why did the newly hired managers not do as well? Investment strategies take time to produce results.
The pension fund fired managers whose used out-of-favor strategies and replaced them with “hot” managers using in-favor strategies. The corporate execs making the decision were not patient enough to allow the strategies of the fired manager to come back into favor.
To be honest, I’ve made this very mistake myself in my career. On our investment committee, we’re very careful about making sure we’re not making a decision to fire an investment or manger simply because they’re out of favor or to hire a manager or add an investment because it’s “in fashion.” Fashion is fickle – which is not rewarded. Patience is rewarded.
The winners are those who wait
What this means to you as an investor: Stay the course. I know I sound like a broken record, but this advice is solid. Don’t panic and try to immediately switch up your investments if they’re not doing as well as you’d hoped. If your portfolio strategy is solid, modest or even negative returns just mean that this isn’t the right time for your investments to show you their successes.
No, patience isn’t easy. But it pays you back nicely in the long run. Sticking with your well-thought-out investment strategy even when you think you could outsmart the market requires yet another virtue: Humility. I’ll explain more in my next blog.
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