Patience
Martin Hawes
April 2024
The stock market is a device for transferring wealth from the impatient to the patient.
Warren Buffet
Some good investment ideas take time to bear fruit. An investor can buy into a wonderful investment but although the thinking is sound, the value may not be recognised for some time. This may be because the company is not fully developed and does not yet produce the expected profits, or it may be because the company is in an unfashionable industry and the market is looking elsewhere.
Whatever the reason, patience is often required; the market could take a long time to wake up to the real value of an investment that you have made, and you could have a long and uncomfortable wait. For investors, an ability to stay calm is more than just a virtue - it can be an essential.
Investors make their decisions and invest. They then have to wait. We all hope that this wait is not too long but in the real world, not often does an investment start to climb immediately after purchase. Staying calm, often in the face of negative noise coming out from the market, is critical. Sure, you have to continue to test your “investment thesis” (the reasons for investing) but if you are confident that you are right you need to hold on and sit tight.
Patience is hard enough in “normal” times but when markets are volatile, life for an investor who is trying to remain clam, rational and patient, becomes very hard indeed.
Investors have their patience tried in the face of a whirl of emotions that come out of the market – in particular fear and greed. I think that the Buffett quote above should be extended beyond the impatient to include the greedy and the fearful as well. In times of boom or bust, staying calm and rational involves suppressing more than feelings of impatience but also fear and greed as well.
In fact, there are often times when markets are driven more by fear or greed than anything else. Think back to the “COVID crash” of 2020 when some markets fell by 40% over a few days. Fear of the virus and what it was going to do to whole economies and businesses prevailed. Although many of us thought that the bust would last months or years, it lasted only weeks before share markets rebounded – greed took over as many investors recognised the extent of governments’ spending responses and markets went on a tear that soon saw them at an all-time high.
First fear and then greed – they are the two emotions behind most of the big, violent swings in markets. However, all the time, top investors stay calm and rational. This is something that Warren Buffett has spoken of many times and in different ways. Buffett is a believer in making investments counter-cyclically – to buy when the majority are fearful and to sell when they are greedy. If you watch what he does, Buffett usually makes big, bold investments when markets have taken a big fall, but sits on his hands when markets are booming.
These rules should not only guide stock pickers; they are just as valid for your KiwiSaver or other investments. Again, if we look back to the COVID crash, many KiwiSaver members (perhaps in a fear driven panic) effectively sold shares by moving their funds to a lower risk investment (that is, say, from a growth fund to a conservative one). However, the share market bounced back very quickly and strongly – most, if not all, of these people will have been stranded and had to wear a loss.
Remembering the “why?” of your investments is important. The best investors always keep their long-term goals in mind. This helps them to remain calm and rational and stay in the market when times turn scary. I acknowledge that looking at a declining balance is uncomfortable, and when that does happen, fear wells up. Conversely, it is easy to get swept up in a great tide when a market booms.
Neither fear nor greed is helpful; greed will see you joining the herd to buy over-priced investments, while fear makes you join a stampede to sell out at the very time you should be buying. Impatience can be just as costly when things do not happen just when we want them to. It sounds boring but a calm and rational mindset is best for investors regardless of what others are thinking and the emotions they are feeling.
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For information relating to Martin Hawes, visit his website. Martin Hawes is not a Financial Adviser or a Financial Advice Provider. The views in this article are not intended to be financial advice. The views and opinions are general in nature and reflect judgement on the date of communication and may change without notice. They may not be relevant to an individual's circumstances. Past performance is not a reliable guide to future performance. Before making any investment, or other financial decisions, you should consult a professional financial adviser. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page. Martin Hawes provides these articles to Forsyth Barr Investment Management Limited for the Summer KiwiSaver scheme and is remunerated for them.