“The stock market serves as a relocation center at which money is moved from the active to the patient.” – Warren Buffett
When my wife and I lived in England, we had the pleasure of visiting her relatives in a small village in Gloucestershire, just east of Wales. Her cousin’s home sat on a plot of land adjacent to a medieval castle that has been an apple orchard for centuries. For a history major like me, it doesn’t get much better than that for a weekend getaway.
While much of the land has since found other uses, it still features a handful of the largest apple trees I’ve ever seen. Come harvest time, the trees have the potential to yield more apples than you could handle.
Many factors contributed to the beauty and productivity of those old apple trees – the right soil and climate certainly helped – but none of it would have been possible without patience from generations of thoughtful owners.
But I want it now
It’s clear that a patient mindset is a critical ingredient for growing enormous apple trees. It would be irrational to dig up a tree that wasn’t producing bushels of apples only one year later, even if all other conditions were favorable.
As equity investors, we too often do the opposite – we pull up the sapling to check the roots – despite evidence that time in the market matters more than timing the market.
Consider, for instance, that the median holding period for an S&P 500 company is just under 130 days, or a little more than four months.
This is not investing, this is speculation. For various reasons, many investors simply aren’t giving their investments enough time to bear fruit.
Why patience works
In a 1995 interview, financial journalist Louis Rukeyser asked 98-year-old legendary investor Philip Carret, “What’s the single most important thing you’ve learned about investing over the past three-quarters of a century?”
For someone who invested through the Great Depression, World War II, the Cold War, and various booms and busts in between, you might expect Carret to have said something like, “successfully predicting market cycles” or, “making the right sector calls.”
Instead, Carret answered simply and without hesitation, “Patience.”
Why might Carret have answered this way? I believe there are three core reasons why patience is a critical component of any successful and resilient investing strategy.
First, by thinking about stocks in three, five, and ten-year time horizons, you’re playing a different game than most investors on Wall Street, who on average focus on the next quarter to maybe the next 18 months. If we aim for differentiated results from our peers, we need to play a different game. Being patient is one way to achieve this.
Second, being patient allows business fundamentals – that is, dividend and earnings growth – to play a greater role in our performance results and allows us to rely less on fickle favorable investor sentiment – that is, higher price/earnings ratios.
Finally, and perhaps most importantly, being patient gives our investments time to realize the benefits of compounding growth. Numerous studies have shown a so-called “behavior gap” between an investment’s returns and its investors’ returns. As the term suggests, the gap in performance is largely attributable to poor investor behavior: buying high, selling low, speculating, trading on news, etc.
According to Morningstar, for example, for the ten years ending December 2014, the average investor in a U.S. equity fund generated 6.49% returns versus 7.47% returns for the funds themselves. That may not sound like much of a difference in percentage terms, but for every $10,000 invested, the average investor’s ultimate balance was about $1,800 less than those of the average U.S. equity funds. Impatience can be costly, indeed.
Guessing how the market or a particular stock will behave three-to-six months from now is at best a coin flip. At Johnson Investment Counsel, we believe a better use of our time is to identify strong businesses – those with skilled management teams, durable competitive advantages, solid balance sheets, and high earnings quality – and then determining whether we can purchase those businesses at an attractive price.
After making this determination, we aim to be vigilant in our continuing research yet patient in our disposition. At times, being patient is challenging, of course – otherwise everyone would be patient – but if we can consistently execute on our process and err on the side of patience, we believe we can deliver satisfactory returns to help you realize your investment goals.
Todd Wenning is a Research Analyst with Johnson Investment Counsel (“Johnson”).
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