Patience & discipline: Two vital traits of every successful investor

Patience & discipline

I find it ironic that the two common financial mistakes that people make are (1) not investing i.e., procrastination or (2) doing too much i.e., turning over investments, changing their mind and so on.

Of course, not doing anything is an obviously bad thing as nothing comes from nothing. I wrote about this in March.

But, sometimes reacting, changing, tinkering, selling, buying and so on can be equally as bad. The truth is that investing requires a lot of patience. The quote below from Warren Buffett’s business partner since 1975, Charlie Munger says it perfectly.

Look at those hedge funds – you think they can wait? They don’t know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting…As Jesse Livermore said, ‘The big money is not in the buying and selling…but in the waiting.’
– Charlie Munger

When it comes to investing, doing nothing is often sometimes the most intelligent thing to do.

Research demonstrates that buying and selling destroys wealth

There’s a commonly cited story about global fund manager, Fidelity conducting research into which investment accounts performed the best. It is said that it found that inactive accounts i.e., where the investor forgot that the account existed produced the best returns, on average.

A study that included 66,465 investors concluded that portfolio turnover (i.e. buying and selling stocks) is inversely related to returns. That is, higher turnover leads to lower (about 5.5% p.a.) returns, on average. Whilst this study only considered stocks, the same would be true for every other asset class.

Three reasons why you need the discipline to be patient

If you have the discipline to be patient, you will enjoy much better investment returns for three reasons.  

(1) Markets move in cycles

Most investment markets move in cycles. That is, a period of above-average returns follows a period of below average-returns, as shown in this chart of historic property returns. If you were unlucky and invested at the beginning of a flat growth period, it’s likely that you must hold an asset for a much longer period to generate a return close to the long-term average (i.e., 7-8% p.a.).

For example, generally, you must be prepared to hold a property for at least 10 years to enjoy the long-term average return (i.e., 7-8% p.a.). However, if you invest at the beginning of a flat period, you’ll have to hold the property for 15 to 20 years. Returns should be similar in both cases (i.e., 7-8% p.a.). The difference is the distribution of returns over time. Investment-grade apartments are a good example of this – see here.

(2) Returns compound

Compounding capital growth takes time. As this chart demonstrates, the projected growth (equity) in the first decade of ownership is $580k. But in the third decade is projected to be $2.7 million! That is the power of compounding returns. The two key ingredients are (1) quality assets and (2) time. When it comes to the impact of time, there are no shortcuts.

(3) Minimise transactional costs

Changing your investments or strategy just because you’re impatient destroys wealth, due to transactional costs and taxes. That is not to say that you should never make any changes. Of course, if you have a dud investment or recognise that you have made a strategic mistake, you must fix it as soon as possible, almost irrespective of cost. But making a change simply because you’re impatient i.e., the market hasn’t delivered returns in the time frame that you expected despite the asset quality being acceptable, is a mistake that must be avoided. In the long-run, fundamentals will drive returns.

When it comes to investing, often, the best thing to do is nothing

Most investors are influenced, to some extent, by fears and uncertainty. Humans are hardwired to predict and avoid risky situations. Therefore, we are susceptible to being influenced by negative news. Of course, that’s why media outlets thrive on negativity.

But what we must remind ourselves is that fundamentals never change. And negative events come and go – but fundamentals are everlasting. Take the pandemic as an excellent example. It was a global phenomenon – as big as a negative event can get. But it too will pass, and investment markets will get back to normal, as we have already started to see.

Therefore, if your original investment decision was based on sound fundamentals, using an evidence and rules-based approach, then you must not make changes to that investment unless there’s overwhelming evidence that long-term fundamentals have changed.

Heed Queen Elizabeth II’s advice

In the Netflix series The Crown, Queen Elizabeth II said “To do nothing is often the best course of action, but I know from personal experience how frustrating it can be.” I know this is a historical drama series, and its uncertain whether the Queen actually said this, but the statement really resonated with me. That’s because it eloquently describes exactly what it’s like for successful investors. You feel tempted to make changes when you shouldn’t. Or delay investing simply because you’re unsure. It’s like logic and emotion are having a tug-of-war inside your head.

In times of high uncertainty/volatility, buy but never sell

High levels of uncertainty, often created by negative news, tends to be a fantastic buying (investing) signal – take Covid and the GFC as an example. In the short-run, markets completely ignore fundamentals. If you have the discipline to drown out all the noise (sometimes it’s easier said than done) and focus solely on fundamentals, it can be an opportunity to make good investments.

Similarly, when the conventional wisdom is that there are no risks and there’s only upside, often that could be the best time to sell (if you need to do so as part of your strategy).

The best thing is to do nothing

If you have invested in high-quality, fundamentally sound assets, the best thing is to drown out any negative noise and do nothing. In the long run, the investors with the most patience receive all the financial rewards.