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The 3 Main Elements of Patient Investing

There are many reasons why long term focused, patient investing earns better results than short term greedy strategies. These reasons are due to the nature of the stock market– the realities many smart people have observed for many decades.

Patient investing makes for an easy catch phrase: “slow and steady wins the race; the tortoise beats the hare”.

patient investing

But being truly patient when it comes to the stock market is much harder than it seems. Really applying it to achieve better shareholder returns requires mastering the understanding behind exactly how this patience contributes to higher returns.

In this blog post I’ll argue that there’s more than 1 element to this patience required with investing (there’s actually 3), and I’ll show why each element contributes to better returns and how you can implement it.

Element #1: Long Term Stock Market Returns

There’s 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 and exposing it to uncertainty. Investments can be unprofitable as businesses can go bankrupt and 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 come 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 crashes are followed by recoveries.

(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 most important part of achieving these returns is where patient investing comes in, and that’s through holding your stocks through the many short term ups and downs. The market can move much more than 10% up or down in any single year, the average comes into play the longer and longer you’re able to hold these stocks.

To achieve average stock market returns, investors must hold for a long time period (think decades instead of years) and they must be diversified so that any one failing business 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: Reversion to the Mean

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

Those bull and bear cycles of the stock market are primarily fueled by the investor emotions like fear and greed. While these cycles do tend to follow the economy’s booms and busts, the market has always over-reacted by pushing prices much higher than they should’ve been or lower than should be reasonable.

This phenomenon has been heavily discussed in great books like Robert Shiller’s Irrational Exuberance, and 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 averaged over the very long term valuations such as the P/E ratio have settled at certain values.

valuation bubble pop

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

There are many studies that have provided evidence to this prospect of higher returns (such as this one by Merrill Lynch), and famous investors such as Warren Buffett have been very vocal about how value investing (buying stocks with low valuations) has been a crucial part of their success.

To buy stocks trading at low valuations with a hope that their valuations will revert to the mean, an application of 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 because 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: Investor Skill

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 the elements of patience, having the fortitude to hold your stock positions over the long term, and picking enough of the right stocks trading 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 a 1 year time period 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 was able to 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.

Don’t take my word from it. Here’s an email I received from VTI client Tom:

“I almost made it through the VTI book, great stuff! Also really enjoy the newsletter and the podcast.

I’ve been learning about personal finance/investing over probably 12 months now. You know, when you try to enter a completely new field, nothing makes sense, and understanding “syntax” is super hard.

Then there comes this time which I find super exciting – all of the sudden, things fall into place, things start making sense, and you feel like you are actually understanding what’s going on.

This is exactly the place I’m at right now, and it’s super exciting.

Your book/the podcast really have helped bring it all together in my head, so – thanks for that!”

Again, with my own experience I can confirm this.

When I first started learning about the stock market, I probably listened to several hours of podcasts per day– and spent many hours (especially on weekends) reading up on investing and the stock market.

After about 6 months, I hit that super exciting feeling that Tom is talking about. Where it clicks into place. Mine came fast but I was all-consumed in learning about it. I have that type of obsessive personality.

Once I hit 6 months, then I really started analyzing a lot of stocks.

That’s when I started analyzing a bunch of stocks back before they either succeeded/ failed, and then looked for any similarities. I looked to see if success or failure was predictable.

I did this for 100+ more hours… a lot of analyzing and manually sifting and scraping of data from annual reports.

I didn’t have any resources back then to help me shortcut my progress for faster results.

That’s what got me fired up about this blog, and now my podcast and products and services. If I can get more people fired up and feeling confident at a sooner point in time, then less people would get discouraged and less would quit.

We could have a community of investors who are actively improving their financial position, when they started from nothing. That’s what I’m starting to see now, after 5 years of doing this, and it’s really exciting.

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’s these 3 elements to consider, there’s many ways that patient investing can lead to great success 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.