Patience in Stock Investing: Mr. Market Rewards Investors Who can Wait

Patience does not come naturally to people. It is a habit to develop. We often do things just for the sake of doing it. The same behavior reflects in people’s investment portfolios. If I may say, patience in stock investing is even rare. 

It is no surprise why we like SIP Plans. It makes us feel good that we are investing regularly. What is the alternative?

Observe the market patiently and do nothing. Buy stocks (equity) only when there is a market correction.

It does not sound difficult. Right? But we will still prefer keeping our investments on autopilot (SIP). Why? Because we do not have the patience to observe the market. Moreover, keeping idle cash gives us jitters.

Being a patient investor has its tall benefits. Patience does not mean inaction. It is a time to observe and do other things.

In this article, we will know about the “other things.” These things we must do when we are not investing. This article will also provide a valid justification for not ‘always’ investing. Practicing it will be a precursor to wealth creation.

Activities of a Patient Investor

patience in stock investing - Flow Chart

You can see the flow chart. Highlighted here are the four things a patient investor does as a part of an investment process. To an outsider, it might look that the investor is doing nothing. But in reality, he/she is following the process in repeated loops.

Allow me to explain the investment strategy consisting of four steps:

1. Identify Companies with a Wide Moat

In my previous article, I’ve explained in detail the concept of an economic moat and how to identify them using numbers.

There are companies with high and sustainable profitability. They tend to generate a higher Return on Capital (ROCE) than their Cost of Capital (WACC). Such companies have positioned themselves more favorably than their competitors. They have a competitive advantage in their sector/industry.

To speak more specifically, such companies have more predictable future free cash flows. It enables them to aggregated a higher intrinsic value for themselves.

A wide-moat company also tends to better its intrinsic value with time. It means, if we buy an undervalued wide-moat stock today, with time, they become even more undervalued. It is why, over time, wide-moat companies can give phenomenal returns.

[Note: The current version of the Stock Analysis Worksheet gives an overall rating to its stocks based on six parameters: price valuation, growth potential, management quality, profitability, financial health, and economic moat.]

“Be patient, and spend time to build your own list of wide-moat stocks when others are searching for quick stock tips from others

2. Keep Accumulating Cash

When other investors buy mutual funds using SIPs, patient investors accumulate cash using Recurring Deposit (RD). The purpose is to hoard liquid cash and invest them when the opportunity comes.

Imagine yourself with lump-sum cash available for investing during the end of Mar’2020 (Covid-19 times). By today, your invested amount must have grown by more than 100%.

Let’s see a similar example from another perspective. Suppose you have a watchlist of high moat companies. You track those stocks regularly. In Mar’2020, you found that the price of these stocks suddenly falls by 35-40% in few days. Now, you are desperate to buy these stocks, but you have no cash. How would you feel? Desperate right?

During such times, cash stacked in the bank’s recurring deposit account can be the savior.

As important it is to stay invested, it is equally essential to keep accumulating cash. This practice will never make us feel starved when the opportunity comes. One of the easiest ways to do this is by paying oneself first.

“Be patient, and keep doing RD when others are boasting about their SIPs” 🙂

3. Waiting For A Price Correction

Waiting for a price correction may sound easy, but it is far from it. To make waiting easier, preparation of a watchlist in Google Finance will help. In the watch list, include only wide-moat companies (step #1)

Against each stock, add a column of ‘current price’ and an ‘estimated future price’. For each company, decide a margin of safety (MOS) – discount over the future price. For example, the MOS of bank stocks can be -10%, and the MOS of large-cap stocks can be -15%. For other Stocks, MOS above -20% will be better.

How to check if the stock is trading at the required MOS? Use this formula:

Current MOS = (Current Price – Estimated Future Price) / (Estimated Future Price)

If you want to do it more professionally, replace “estimated future price” with the stock’s estimated intrinsic value. Buying stocks at a discount to their Intrinsic Value is an assured wealth-building strategy.

“Be patient, and wait for the market correction”

4. Buy and Hold For Long Term

Experts like Warren Buffett advocate a very long holding time for stocks (like forever). But there is a caveat. Not all stocks are suitable for long-term holding. Only stocks of wide-moat companies qualify for such preferential treatment.

Wide-moat stocks have a distinct advantage. Their share price appreciates at a rate faster than the market’s average. Hence, it becomes easier for investors to hold on to such stocks for a very long time. In fact, people are motivated to stay glued to such stocks.

The price of narrow or no moat stocks will not appreciate consistently. People may have to wait for a very long time to see even a decent price appreciation.

Holding good stocks for the long-term has its own benefits. I’ll suggest you kindly read this article on the effects of share split and bonus shares. It will give an idea of what potentially can happen when wide-moat stocks are held on to for periods like 15-20 years. Suggested Reading – what are compounding returns?

Moreover, buying stocks first at a discount and then selling it too soon makes no sense. One must give at least 3-5 years for a portfolio to show its potential.

“Be patient in buying wide-moat stocks with an intention to hold on to them forever.”

Conclusion

If a small investor can follow these four simple rules, the probability of beating the market is greatly enhanced.

Out of all the steps mentioned above, I give a lot of weightage to cash accumulation (#2) and waiting for a price correction (#3). But to win the overall battle, it is essential to buy wide-moat stocks at a fair price.

To practice patience in stock investing, we must follow the above-explained four-point strategy: to identify, accumulate, wait, and hold.

So we can say that, even when a trained investor may look like he/she is doing nothing, in the backdrop, a lot is happening. At least, they are “holding” a heap of wide-moat stocks and letting the power of compounding kick in.

“The big money is not in buying and selling, but in waiting”

– Charlie Munger
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Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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