Understanding how patient investing boosts success
Time, and more specifically PATIENT INVESTING, is essential to portfolio management. However, most investors fail to consider time when they make an investment or develop a strategy. The sooner, the better is the default philosophy.
A lack of patience, however, often leads to poor results. In the words of The Bowser Report’s founder, R. Max Bowser:
We hear frequently that common stocks are one of the best investments--if not the very best--you can make. Long term. Short term they can be disastrous; Las Vegas could be a better bet.
Why? You can blame the liquidity of stocks. You can buy one and sell it minutes later. Try that with real estate. This very liquidity causes some investors to have a short-term view.
In fact, no other investment form has the liquidity of stocks. Because of this, many equity investors have unrealistic expectations. They want sensational results quickly.
If a stock doesn’t double in a year or two, they are ready to throw in the towel. They ignore the fact that it takes time for a company to develop.
That passage is from Bowser’s 2004 edition of Making Dollars with Pennies. Now, over 15 years later, investors are still impatient--arguably, even more so.
Patient investing has gone out the window
Following the Covid-19 selloff, stocks large and small appreciated like seldom seen. A combination of factors caused stocks to rapidly hit and continue hitting new highs.
Small stocks in particular performed exceptionally well. In fact, the Russell 2000 Index appreciated over 140% from the Covid-19 low in less than a year. The Russell Microcap Index even outperformed the Russell 2000, appreciating over 190% over the same period. (The S&P 500 appreciated less than 100%.)
While the short term gains are nice, this rapid run up altered investors’ expectations. Patient investing has gone out the window. Even investors who once maintained a long term outlook have reset their expectations.
Still, “patience is a virtue,” (as the saying goes) and a profitable one at that. Let’s explore why that is.
Warren Buffet once said, “The stock market is a device to transfer money from the impatient to the patient.”
The three keys to patient investing are:
- Decide upon a strategy that suits your investment style and objectives
- Plan each investment (why invest in this stock and what would it take for you to exit?)
- Understand that individual stocks and the stock market as a whole don’t move in straight lines, so you’ll need to control your emotions when things aren’t moving your way
As Benjamin Graham said, “In the end, how your investments behave is much less important than how you behave.”
To demonstrate the profitability of patient investing, we’ll consider a Bowser recommendation that rewarded investors who stuck with it: Leatt Corp. (LEAT).
Leatt Corp. (LEAT)
LEAT was The Bowser Report’s Company of the Month in December 2017 when it was trading for ~$1.90 per share. Below is a chart of the stock’s performance since:
Prior to 2020, LEAT ranged between $0.67 and $3.30.
Despite the ranging back and forth, over that same period, financials consistently improved. This consistent growth was a big part of our initial attraction to LEAT and something we noted in our original write up despite a slight departure from consistent sales growth in Fiscal 2016. The chart below show this growth:
LEAT continued to deliver not only year-over-year sales growth, but also bottom line growth. Those practicing patient investing would have no reason to sell.
Some two plus years after recommendation, as the market recovered from the Covid-19 selloff, LEAT outperformed drastically, gaining over 1,700% from its April 2020 low.
1,000%+ gains are rare. However, the lesson remains:
You invest in a company. Companies take time to grow, and investors take time to catch on. As long as the reason you got in remains, the pay day will come.
Putting it all together
Patience pays by increasing the odds of success. 1,000% gains are entirely possible if you trust in the long-term outlook. However, most investors will hit singles and doubles to use a baseball metaphor.
The plan for LEAT was to invest in a company demonstrating consistent growth. Plan for a 100% gain (in accordance with the Bowser Game Plan) but allow for room to the upside. As sales and earnings grew consistently, we ignored short term price fluctuations and waited for investors to catch on, which they did big time.
The worst thing you can do as an investor is invest without a plan and without conviction. Stepping out of the batter’s box because of a strike or two (to continue the baseball metaphor) is a guaranteed loss.
Make a plan, as in LEAT's case, and be patient as it comes to fruition.
In another post, we’ll talk about DISCIPLINE, the other key to portfolio management. Discipline ensures that while you’re being patient you have a plan to (1) LIMIT LOSSES and (2) capitalize on gains.