Having the talent and drive to succeed are great, but without patience, they’re often not enough to get to the finish line.Brady Willette/Getty Images/iStockphoto
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Short-termism is the enemy of building wealth. History shows that patient investors are more likely to outperform over the long term. Unfortunately, patience is in short supply.
Whether it’s the average tenure of chief executives or the average holding period of stocks, both have been falling steadily. Technological advancements may be one of the culprits of our global impatience epidemic. As Herbert Simon – the American Nobel Prize-winning political scientist observed – “A wealth of information creates a poverty of attention.”
Patience often gets short shrift even though it may be an investor’s superpower.
It’s no coincidence that some of the world’s most successful investors are proponents of the patient approach to building wealth. Legends such as Warren Buffett, Howard Marks, and Philip Fisher have all spoken about its merits. Mr. Buffett has stated his favourite holding period is “forever.”
Life experience confirms that being able to delay immediate gratification and overcome internal and external obstacles in pursuit of long-term goals is a worthy endeavour. Having the talent and drive to succeed are great, but without patience, they’re often not enough to get to the finish line.
Some people conflate patience with passivity. But they’re not the same. Patience is active. It entails being focused sharply on a goal and being opportunistic about how and when to act on it.
Capital markets provide an excellent testing ground for developing patience. They rise over the long term despite periods of drawdowns. This makes a good case for the benefits of staying invested.
Nevertheless, experiencing those market loop-de-loops in real time, in real dollars, as most investors have this year, has been emotionally taxing.
That’s one area in which financial advisors have a key role to play in supporting clients to build their “patience muscle.”
The advantages of ‘staying the course’
Part of the assistance is of a tactical nature and may include adding an allocation to non-correlated assets or employing alternative strategies to smooth out portfolio volatility and generate positive returns throughout the economic cycle.
In addition, it’s important to remind clients of the ancillary costs of panic selling, which include capital leakage in the form of commissions, trading costs and taxes, not to mention the potential of locking in losses permanently.
No one can time the markets successfully and consistently. It’s far better to construct a resilient portfolio that can withstand various market conditions while, at the same time, being in alignment with the client’s risk tolerance.
Advisors could also highlight other advantages of staying the course. These include benefiting from the power of compounding wealth through capital appreciation and dividend growth, and the opportunity to purchase assets at better valuations.
The importance of investor education
Independent of the market’s mood, it’s always worthwhile to educate clients and build trust.
Often overlooked amid discussions of investment strategies is investor education. Being clear and honest in communicating with clients is paramount.
Does your client believe you “walk on water?” While flattering, it’s important to remind them that no one can understand and predict the direction of markets consistently.
Investor psychology and the market’s mood may be sensed but never guaranteed. These emotional factors often drive markets – at least in the short term – far more than fundamentals.
Like anything else, patience can be cultivated. Those who have studied martial arts may be familiar with the term “wuji” or “wui chi” (pronounced woo jee), which translates as “without limits.” Wuji is a form of standing meditation, which is deceptive. It’s often the first and the last step in a series of movements.
To an outsider, the person is simply standing still but it is the opposite of passivity. There is a lot happening in mind and body, and anyone who has practiced wuji can attest, it’s much harder than it looks.
In investing terms, you could compare wuji to creating optionality in a portfolio – from here you can go anywhere.
An ancient African proverb says patience is a tree whose roots are bitter, but its fruit is sweet. This year, many investors have been left with a bitter taste but, if history is any guide, there may be sweeter times ahead.
Felix Narhi is chief investment officer and portfolio manager at PenderFund Capital Management Ltd. in Vancouver.
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