IS PATIENCE REALLY A VIRTUE?
Some people are patient to a fault, while others have no patience. When I use the computer, my office manager tells me to be more patient. When I drive or channel surf, my wife jokes that if I had any patients I would have been a doctor. But as an investor since my teens, I developed an abundance of patience during the research process.
Studies have documented that most people are less patient as investors than they are in their daily lives. Patience seems to be the most difficult emotion to conquer in this world that values immediate gratification.
Why do so many people claim to be long-term investors, but act like short-term traders? We are regularly bombarded with too much information through television, newspapers and the internet. Some information is factual but most is opinion. Many analysts and forecasters freely share their opinions about the future but fail to share their hidden agendas. Some will be proven correct, but most are wrong. Very few are consistently correct – and they rarely share their opinions.
Of course, acting on all the stock tips, forecasts of extraordinary expected profits, or gloom and doom predictions may lead to excessive trading with dire consequences. Some ideas are on target, and a quick sale will be profitable, but at the risk of missing much greater profits over a period of years.
Facebook is an excellent example. After their initial public offering (IPO) the price immediately went up but then declined dramatically and the stock price remained low for some time. In hindsight, those who sold quickly made money but those who waited and watched the price decline finally sold and lost money. Patience was in short-supply while the price declined. When the price reversed along with positive earnings, those who lost money were reluctant to reinvest. The patient investor who believed in Facebook’s solid business model continued to hold the stock and ultimately earned a small fortune.
There are other examples where the price declined over a period of years. General Electric, formerly one of the greatest global companies, declined after Jack Welch retired as the CEO, and the stock remained depressed for well over a decade. Sometimes too much patience is clearly not a virtue but poor judgment.
The better strategy is to begin with a fundamental basis for buying a stock based on the company itself, including management, sustainable earnings history and growth, market share, competitive advantage, dividend history, etc., and the stock, including P/E ratio, growth, momentum, volatility, and whether it is over or undervalued. Many set a target price objective based on valuation. Others, like Warren Buffett, prefer a holding period of forever. But even Buffett changes his mind based on future events that require a sale or substantial reduction in his position, such as recent liquidations in IBM and Wells Fargo. The point is that if you just buy based on a tip, price movement is the dominant factor motivating a sale. With research and understanding of a company, there is confidence to patiently hold the stock through short-term periods of declining prices.
There are many other areas where investors become too impatient to their detriment. Several studies in the investment industry document that the average investor underperforms the long term performance of their fund because they sell too soon. For one reason, buy orders increase exponentially when optimism runs high. Sell orders increase during declines and pessimism. This pattern is counter intuitive to the principle of “buy low, sell high”. Contrarians, like Buffett who I promise not to quote again, has famously said he wants to be greedy when others are fearful. Those who follow the crowd buy at the top when stocks are popular and sell at the bottom when they fear they will lose their money.
One last example is the huge increase of open-ended investment company sales when the lead portfolio manager quits. Madison Sargis and Kai Chang, authors of a study by Morningstar entitled, “The Aftermath of Fund Management Change”, concluded that investors sold their funds when management changes were announced, even though his/her departure did not adversely impact the fund’s performance (Sargis & Chang, 2017). This selling frenzy often continues for a year or more. In most cases, the fund is run by a team of analysts and co-portfolio managers. They have a detailed investment philosophy and process to manage the money in a detailed and repeatable manner. After Bill Gross’s sudden departure from Pimco, huge redemptions from Pimco’s flagship fund totaled almost 60% of its assets. Pimco had and still has an extensive cast of talented professionals and resources, and their performance is still at highly competitive levels.
At Kaye Capital Management, we have a disciplined buy and sell strategy. When a portfolio manager departs, it triggers an immediate review of the fund. We do our research, investigate the remainder of the team, and exercise our judgment to sell immediately or wait and see the results over 2-3 quarters, and then decide. We sometimes conclude that the manager received the credit for the creativity and intellect of an experienced staff. In such cases, we are rewarded for our patience.
In many cases patience is a virtue but it can sometimes be a curse. With 20:20 hindsight, the answer is clear; but only experience, research, wisdom, and sometimes luck, lead to the correct decision going forward.
Marv Kaye, J.D., CFP® Kaye Capital Management
References Sargis, M., & Chang, K. (2017). The Aftermath of Fund Management Change. Morningstar.