Warren Buffett’s long time business partner, Charlie Munger, who incidentally, will turn 100 in January next year, famously said, “The big money is not in the buying or the selling, but in the waiting.”
The more investing experience I accumulate, the greater the appreciation I have of how true this statement is.
It is interesting to me that many Australians’ fall into two camps. Either they procrastinate beginning their investment journey or they are in a hurry to build wealth as fast as possible, often taking too many risks.
The aim is to achieve a perfect balance between these two extremes. You most certainly must invest as much as necessary to achieve your goals as soon as it’s safe to do so. But, once you have made these investments, you must have the discipline and patience to let them do their thing. Some things can’t be rushed and just take time.
Returns are never linear
The past few years is a reminder for us all that investment returns can, and often do, vary dramatically from year to year. In the short run, investment returns are very unpredictable. But over much longer periods of time, such as decades, investment returns become more predictable because the volatility evaporates and cycles even out.
For example, this chart shows the property markets move in distinct cycles i.e., either a growth or flat cycle. To enjoy average returns, you must hold a property long enough that you experience at least the same number of growth cycles as flat cycles.
The table below shows how volatile returns can be over periods less than 10 years i.e., they range between -11% and +5.4%. However, returns over decade plus periods are more stable/predictable. They have ranged between 7.1% and 7.5% p.a. except for 20 years (as Sydney has experienced two flat cycles and only one growth cycle over the past 20 years).
Here’s a perfect example to make my point
One of my clients purchased an investment property in Ashgrove, Brisbane in 2007 for $555,000. Ashgrove is an investment-grade suburb, but the problem was that as my chart shows, the Brisbane market didn’t grow much between 2011 and 2018. Therefore, by 2019, almost 12 years later, this property was worth only $750,000. That equates to a compounding annual growth rate of only 2.6% p.a. Naturally, my client was concerned by this fact and wanted to sell the property.
Today, his property is worth approximately $1.15 million. Therefore, over the first 12 years of ownership, the property’s value appreciated by only $195,000. And over the last 4 years, the property has appreciated by an additional $400,000.
The overall growth rate since 2007 is still only 4.8% p.a., which is below the long-term average of 7.1% p.a. However, this is an excellent example of how some properties just take time, especially if you purchase them before a flat cycle.
I have high confidence that if my client retains this property for another 10+ years (which I’ve advised him to do), that the average growth rate since 2007 will eventually revert to the mean of 7.1% p.a. That is, it is likely that there is more growth to come.
Know when to hold ’em, know when to fold ’em
When it comes to successful investing, 9 times out of 10, the best thing to do is “nothing”. Wait. And once you’ve done that, wait longer.
However, sometimes investors are unhappy to do nothing. They feel that they aren’t being proactive enough. But this is untrue. Exercising patience is something. A very important “action” that you must take as a successful investor.
I understand doing nothing can be a challenging thing to do. It’s not always easy. It feels like you’re accepting of substandard returns. You worry that you won’t achieve your financial goals. Patience is a (necessary) skill.
Successful investing can be summarised in two simple steps. Firstly, make sure every investment is fundamentally sound (e.g., evidence-based, low-cost, high-quality, etc.). Secondly, hold that investment for many decades and do nothing else.
What to do to avoid having to wait too long
When making an investment, it is wise to consider past returns. If you invest in a market that has recently experienced above average returns, then there’s a risk that a flat cycle (or correction) is around the corner.
For example, my client purchased his investment property in Ashgrove in 2007 after the median house price in Brisbane appreciated by over 15% p.a. between 2001 and 2007. He bought at the peak of the market. It’s no wonder that the property didn’t grow much over the first 11 years of ownership.
In another example, the NASDAQ (a US tech-centric share market) has returned over 22% p.a. over the past 10 years (a 7.3 x return), so be careful investing in the US technology sector today.
To avoid having to wait too long for good investment returns, invest in proven markets that have under-performed over the past 5 to 10 years using proven, evidence-based methodologies. That is, invest in markets that are intrinsically undervalued, but never do that at the cost of compromising the investment’s underlying fundamentals. This will allow you to benefit from mean reversion and hopefully enjoy above-average returns, sooner.
When to not be patient
If your investment is not fundamentally sound, no amount of patience will help. I have always said that there is never a bad time to invest in a fundamentally sound investment. But, also, there’s never a bad time to sell a fundamentally unsound investment.
Of course, you should be strategic about it – there’s no need to fire sale a dud investment – but there’s never a good reason to retain an underperforming, substandard investment long term.
Patience is only necessary after you have established that your investment is fundamentally sound.
Patience Grasshopper…
Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.” That statement is true for all investment asset classes, including property.
Invest well and then do nothing for many decades. Simple, not always easy.
