Updated – 12/6/23

The nature of the stock market makes patient investing the BEST investing. Smart people have observed this for many decades. Two easy catch phrases summarize it nicely:

“Slow and steady wins the race.” “The tortoise beats the hare.”

But being truly patient regarding the stock market can be much harder than it seems. Really applying it requires understanding exactly how and why patience works.

There’s more than one element to this patience (there are actually 3). I’ll show why each element contributes to better returns and how you can implement it.

Table of Contents

• Element #1: Long-Term Stock Market Returns
• Element #2: Trust in Your Stocks Despite Volatility
• Element #3: Build Your Skill Over Time

Without any further ado, let’s dive in.

Element #1: Long-Term Stock Market Returns

There are a few certainties when it comes to investing your money in the stock market and quite a bunch of uncertainties.

The very definition of an investment means putting your money at risk. Investments can be unprofitable as businesses can go bankrupt. Stock markets can crash.

This reality of uncertainty can be scary, as there are plenty of stories that circulate of investors and professionals “losing it all.”

But along with all of the uncertainty comes some easily observable realities of the stock market…

1. There are boom and bust cycles of the economy which reflect into the stock market as bull and bear markets.
2. The stock market tends to move upwards over time. The bull markets tend to run much longer than the bear markets, and recoveries follow crashes.
3. Many professionals have observed that over the very long term, the stock market averages a 10% return per year.
4. The stock market is comprised of businesses. And the business world has been able to grow over time through innovation, productivity, and population growth.

Perhaps the most applicable part of these observable realities is #3. 

As long as investors hold stocks over the very long term, they can reasonably expect to achieve returns that are similar to the 10% average.

The market can move much more than 10% up or down in any single year (in the short term). The 10% average comes into play the longer you can hold these stocks (over the long term).

To achieve average stock market returns, investors must hold for a long time period.

Think decades instead of years.

And an investor must be diversified so that any one mistake doesn’t drag down total return.

Showing patience, in this instance, means holding stocks through short-term volatility with a focus on long-term results.

Element #2: Trust in Your Stocks Despite Volatility

Another observable reality of the stock market leads to our second element of patience.

Those bull and bear cycles of the stock market are primarily fueled by investor emotions. In particular, fear and greed.

While these cycles do tend to follow the economy’s booms and busts, the market seems to have always over-reacted. “Mr. Market” pushes prices much higher than they should’ve been, or lower than reasonable.

Great books like Robert Shiller’s Irrational Exuberance have heavily discussed this phenomenon. It can be easily observed by looking at valuations.

For example, the average P/E ratio of the stock market (the S&P 500) has historically been around 15. For the Dow, that number has been around 16.

Investor fear and greed have pushed those P/E’s much higher and lower throughout the years, but have settled at certain averages.

Generally, investors who’ve purchased stocks below the average P/E have earned excess returns. It’s due to a combination of the average long term return average of stocks PLUS the reversion to the mean of valuations.

Many studies have provided evidence to this prospect of higher returns– such as this one by Merrill Lynch. Investors like Warren Buffett have been very vocal about how value investing has been a crucial part of their success.

To buy stocks trading at low valuations with the hope that their valuations will revert to the mean, patient investing is paramount.

Investors must trust that stocks with low valuations are, by definition, “hated” by the market, and come with extra fears and uncertainties. There will be many unbelievers. This will often mean short-term volatility and the potential for a stock that continues to drop, but also a nice boost to the price when the valuation reverts.

Combining reversion to the mean (commonly referred to as “buy low”) with the average of stock returns over the long term can lead to outsized returns if applied correctly.

Element #3: Build Your Skill Over Time

Which leads to the final element of patient investing.

Many investors like to imagine that they can easily achieve higher stock market returns. Many people believe they are smart and rational– whether there’s evidence to the contrary or not.

Applying patience, having the fortitude to hold for the long term, and picking great stocks at low valuations is easier said than done.

While we’d like to believe that this is something that can be learned and applied overnight, the reality can be quite harsher. There are few things in life that you can just pick up overnight. Most skills worth learning take a significant time investment.

I’m noticing 1 year for basic competency. But don’t let that discourage you. Here’s why…

Look at some examples that support this claim. I taught myself to play guitar years ago. I’ve noticed that I could play many popular guitar riffs after 1 year of regular practice, as reported by this article.

Richard Eng on Quora has talked about how it takes patience and persistence to learn how to code. He stated you can be a “junior programmer” after 1 year of study.

What about learning a spoken language? FSI research indicated about 480 hours required to learn basic fluency in a new (level 1) language, about 1-1.5 hours per day for 1 year.

Well, that sounds foreboding, right?

Actually, it should make you feel better about being a beginner. One of the biggest frustrations I get from beginners is that they feel overwhelmed by all the jargon.

They talk about too much information out there.

But you can see that it’s not just the stock market that has this difficult learning curve. It seems to be common with many skills.

Which means that you can do it. You just need patience and persistence.

Getting to that 1 year anniversary of learning about the stock market will get you to a place where at least you feel confident about it. Mastery can come later.

Conclusion

Patient investing means holding your stocks for the long term, regardless of where the market is today, and/or how hated your stocks might be at the present. It means not expecting yourself to be a master investor right away, and allowing room for mistakes.

While there are these 3 elements to consider, there are many ways that patient investing can lead to great success, whether that’s through the stock market or otherwise.

But again, it requires understanding the basics, mastering and applying them. I’d say the next step from here should be learning about compound interest, the necessity of diversification and dollar cost averaging, and then the power behind a value investing approach.

Regardless of where you decide to go from here, I want to emphasize that you can do it.

There’s no secret formula to the stock market– there’s simply those who are rational and patient vs. those that are not.

I hope that if you’ve had the patience to read this far, you can extend that into great results with your money.