Investing 101: Patience

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You’re Asking The Wrong Question

One of the greatest flaws in the average investor’s mindset is their initial approach to investing. They want an instant result without understanding the long-term battle they must face if they want to be a successful investor. The greatest warriors they will have to face are Time and Patience. The first cannot be beaten, the second can be managed.

The question is not WHEN should I buy a stock. This implies that you have the knowledge to time the market which is a fools errand. The first lesson is to not try and defeat time, because in the end it will always win.

 

Well Thought Out Decisions Are Easier to Commit To

Consider someone who blindly bought a stock off a recommendation from a friend versus someone who took the time to research the company and understand the business. Now take a negative event for the company (a poor earnings result or lowered guidance). The investor who blindly bought the stock may panic and call his friend yelling at him for suggesting a bad stock. The person who performed his diligence may see this poor earnings as a minor setback which does not change his fundamental reason for purchasing shares. While the first investor may sell, the second may buy more. Whenever you do not give an investment decision the proper due diligence and research before pulling the “buy” trigger, you do yourself a disservice. When your decision is not well-researched and thorough, you will easily change your mind.Remember, whenever you buy a stock there must be a seller, so whenever you buy a stock you need to think – someone is selling me this asset – is this something worth buying?

You Cannot Accurately Predict The Length of Business Cycles

Many companies will have periods of strong growth and periods of weaker performance and setbacks. Consider an industrial company (cyclical) in a down cycle. They have machines that are aged and require maintenance, they have not lost any major customers, yet the economy is in a slump and they are not generating the return they made years ago in an economic boom. Should you stop investing or sell? Not necessarily, the company can use a down period to emerge a stronger business. For example, they can start to cut unnecessary costs, invest in their core business and equipment which may have been difficult when everything was being 100% utilized in busy periods, they can look for ways to take a larger share of the market and continue to build customer relationships. The list goes on. In this down cycle, most likely their multiple is depressed and investors have dumped this stock and it has lost favor. Buying the business here could really pay off once the business cycle picks up and everyone who dumped the stock is now looking to buy shares (now at a higher price due to increased demand) and your investment appreciates in value.

We cannot time when businesses will perform their absolute best. What we can do is research and identify great businesses. This is all based around a fundamental belief of mine which is that a strong business will outperform the general markets and thus inflation, thus the key is identifying and investing in great businesses.

 

from A River Runs Through It

 

Fishing Helps

A waiting person is a patient person. The word patience means the willingness to stay where we are and live the situation out to the full in the belief that something hidden there will manifest itself to us. – Henri Nouwen

Just like investing, you need time fishing not timing fish. When I was a child, I had the pleasure of fishing in the northern woods of Wisconsin. A small river ran through my Uncle’s land – I remember a particularly good day of fishing with my Uncle – the right season and water level helped – but I would have caught little without the patience and teaching of my Uncle who spent hours fishing in the river testing different locations and lures to ensure the best chances of success. Any good fisherman knows there is no shortcut to success. Fishing is a process – you have days where you reap the rewards of your practice and patience and days – character building days – where you can cast for hours without a single bite. It would be foolish to give up on a fishing spot too quickly because it requires a multitude of factors to have success. This is the same as investing. One bad day should not ruin your approach and your process. You must stay the course to reap the rewards. A great business can trade flat for several years before surging in share price. Consider Microsoft (NASDAQ:MSFT) a strong business that hovered around $25 per share for many years with improving fundamentals and now trades just shy of $100 per share. A wise investor should allocate a percent of their pay to quality stocks on a consistent basis and avoid falling into a trap of trying to practice market timing. Trust the process.

 

A Stock Tip

One company I am currently researching is SAP. They are deeply entrenched into numerous companies and are essential to day to day operations. They have ~400k customers with more than 150M cloud users making them the largest enterprise cloud company. 76% of all worldwide business transactions touch an SAP system. Wow! SAP S/4HANA enables businesses to operate all their processes in real time.

With a strong core business and a growing cloud business this is a great one to research further. In the next article I will dig into the characteristics of a strong business and come back to SAP. Thanks for reading. Need help identifying great businesses? Check out our latest holdings in our growth portfolio currently outperforming the S&P 500!

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