I was recently lucky enough to spend a week cycling in the Outer Hebrides. We camped every evening along the coast of some of the most beautiful islands anywhere in the world, cold winds from the North Atlantic Ocean washing crystal blue waves onto brilliant white beaches. As a recommendation for a unique and special place to visit in one’s life, these islands are highly recommended.
This trip was most certainly supposed to be a break from the ‘day job’ of investing. But surprisingly, I came back with a valuable story about the core principles investors should be thinking about when allocating capital.
One evening, our intrepid group of adventurers were on a beach on an island called Barra. The evening sun bathed the wide natural harbour in warm orange light. Some members of our team were heating up the coals on a barbeque to cook our dinner. One of the team, a professional musician with no experience of working in financial markets, asked me a simple but excellent question: ‘if you had to sum up the most important lesion you have learned in your investing career, what would it be?’
I stopped for a moment, and then for another. I’ve never been asked to simplify it all into one answer before. And I wanted to give an accurate answer.
After thinking for a moment, I said one word: ‘patience’. My friend nodded and asked me to elaborate, ‘what do you mean… how does patience help you make money as an investor?’
I explained to him that patience, above all other factors, is fundamental to investment success over the long-term. There is no consistent way to ‘get rich quick’ when investing in financial markets. Some people may get lucky, just as there are some who get lucky in the casino. But this is not a model for the average investor.
Patience is what works consistently. Owning businesses as an investor in equities for the long-term, refusing to sell during bad times when markets are declining, avoiding taking profits when share prices rise. Sticking with your strategy and letting your investments compound… this is what works consistently.
What my friend had done was ask exactly the right question from the perspective of a retail investor with minimal knowledge of investing. What is the one thing I need to know.
The question forced me to simplify a career spent in investing into one simple answer. And the answer was the right one. Patience above all is what earns investors exceptional returns over the long-term. Owning equity in high quality businesses growing profits at, say, 10% to 15% per year will compound over time at those rates (all else equal).
This means in year 1 you will see a 10 to 15% rise in value of your investment. Then the following year another 10 to 15%. Stock markets are volatile, so in year three you may see the value decline if markets are weak. Many investors (professional and retail) will trade this stock through that cycle, maybe selling at the end of year two, booking in a +21% to +32% return (10 to 15% compounded over two years). Others may sell during the weak year in year three.
Few investors hold out and just keep on owning the stock, with a true long-term ownership mindset. But if we model that same stock earning (let’s be conservative) 10% growth in earnings each year out to year 15, a buy and hold investor would be sitting on a return of +417%. By year 20 it would be a +673% return. An initial $200,000 investment would, by year 20, be worth close to $1.5 million.
Patience means letting compounding returns do its thing.
Don’t get in the way.
Buy and hold!
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