Mindset of Patience

Threadgill Financial |

A few years ago, a friend and fellow advisor laughingly said I have the patience of Job. Job being the guy who suffered unending maladies while maintaining his faith in God. I smiled and accepted the compliment. My friend was referring to my patient listening ear after an hour-long barrage of questions from a challenging client. I shrugged it off as a normal part of my job. As a younger man I was proud of my ability to make snap decisions. However, the more of those snap decisions turned out to be uh, not so great, I slowed my pace of decision making. Now, I sometimes feel I take way too long to decide on things I once would have spent no time on. Hopefully this is the beginning of wisdom.

Charlie Munger (Warren Buffet’s long time business partner and friend) says the stock market is set up to transfer money from the active to the patient. “Don’t just stand there–do something” is frequently the exact wrong advice when it comes to investing. When I used to buy houses to fix up and sell, I’d look at dozens of houses before finding one worth making an offer on. It would have been more exciting to make many offers, but it was much more profitable to wait for the really outstanding deals. It is the same way with investing in the stock market. Stocks are just little pieces of businesses. The prices those businesses are based on are sometimes rational and many times irrational. You can be irrational by being willing to pay too much for something or by being unwilling to buy something even when it’s a bargain. If we wait for the market to be irrational and give us bargain prices, it is much easier to make money and much less risky. It is less risky for me to buy stocks for you when prices are lower. That means we wait for things to be bad, for the market to be irrational and scared and buy when everyone else is selling. Sure you could go all in right now and be fully invested. If your time horizon is long enough, that could eventually work out. But remember, in the long run we’re all dead! I believe what you want, is for me to make decisions for you based on the time horizon that you’re alive…right?

The problem is valuation. In the 1970s, there was this idea of just put all your money in the nifty 50, the stock market’s 50 most darling companies of that era. Investors followed this strategy to such a degree it pushed the price of those stocks much too high. If you pay too high of a price for a great company, despite the quality, you may still not make money for a decade as the company’s fundamentals catch up with the lofty price you paid. So the reason we’re not plunging in given the unknowable future, is simply many of the great companies we would like to own are expensive. Regardless of what the future holds, we are likely to get lower prices in some stocks along the way. With the patience of Job, we will have cash and be ready to buy those stocks when the opportunities arise.

The Federal Reserve is keeping the markets up by levitation. That won’t last forever. Going back to my real estate deals, there was a point in the real estate cycle in 2006 where I just decided to stop buying because I thought much lower prices were ahead. I didn’t want to be stuck owning something worth less than I paid for it. I was right but about 1.5 years too early. I could have pushed my luck and squeezed in a few more deals during that time and made some more money, but I had previously learned my lesson about owning an investment that was priced irrationally high. Given both experiences, I’d rather be a little early than a little late. We’re still better off having been out of stocks since last April waiting for lower prices, though it is getting close. I am very aware of how painful it can feel, when it seems you are missing out on making money. Losing your money is worse. I view my job as making decisions for you that I would make for myself if I were in your shoes, knowing what I know. Because not all stocks move in sync with the market, there will be opportunities along the way regardless of market direction, and you can count on me to help you profit from those opportunities.

—Zac