September 2, 2008 - "Patience is the best virtue"
Summary: Everyone's parents stress the importance of being patient, but patience is a virtue above all others in investing. Hands down the #1 rule in investing is to wait for your opportunities with no pressure to put your money to work. Patience is key!
When investing, there seems to be an ever-present pressure to use your money and buy something. Especially when investing in stocks, it just seems wrong not to be fully invested and to have cash on hand. Always having cash available and not being fully invested and stretched out can be the best thing that you do for your portfolio.
Think about this: Why do the best investors always keep a cash position of between 5-20%? It's so that when the market goes down, they have money to buy undervalued investments. For example, if you were fully 100% invested and the market goes down 20%, a normal correction, you are subjected to the volatility and the whims of the market. However, if you are only 80% invested and have a 20% cash position, then 1) you didn't lose as much money as the market 2) you will now recover your money faster because you can buy on the way down. The goal of investing is to not lose money...keeping spare money to buy in downturns is one of the best ways to accomplish this goal.
This patience to not be fully invested is crucial in a second way. It forces you to be a disciplined investor. By not feeling a pressure to always be fully invested, it allows you to only invest in your best ideas. You should pile money into your best ideas. If you can't find good ideas, then it doesn't matter if the market is going up, you should trust yourself and not invest. This kind of discipline is hard to enact and why there are so few good investors. It sounds easy in practice, but in a year where the market may be up 15 or 20%, it's hard to justify to yourself why you aren't fully invested. Having money so you can wait for your investments allows you the flexibility to take advantage of opportunities that make you wealthy in the long run.
Warren Buffet said, "There are no called strikes in investing." Yes, we all feel bad when we almost invested in a company, and later that year it ends up being a big winner, but we shouldn't feel bad about the winners we almost had. We should only worry about the losers we actually picked. There are no called strikes...Mr. Buffett is trying to remind us that there is no to punish us for failing to invest in something. Yes, we feel bad for ultimately not taking advantage of something that ended up being a winner, but it is better to err on the side of caution. If we can't know for sure that we are going to make money, if the opportunity isn't obvious, then we shouldn't feel bad.
I'm fascinated by this story because it highlights the point I've been trying to make perfectly. In 1969, Warren Buffett literally ended his partnership of 100 million dollars because he couldn't find enough opportunities in the market to justify his fees. He gave people back their money instead of investing in bad opportunities.
Patience is crucial as investor. You need to wait for investments to come to your price before you buy. You need to always have money available to buy these opportunities...resist the urge to be fully invested. Finally, you need patience to let your investment ideas pan out. Results aren't always instantaneous. Sometimes it takes a couple of years for your ideas to come to fruition and you really make your money!
