Recently the financial press trumpeted that the S&P 500 was at a new “all-time high.” In one sense this is a good thing, a sign of strength and resilience, that the market has recovered from the financial crisis and is breaking new ground. In another sense though, many stocks are getting expensive and bargains are harder to come by than they have been in a while.
In markets like these, patience is key. Seeking out reasonably priced, high-quality stocks is essential because you can’t rely so much on market wide “multiple expansion” which is the rising tide that sometimes lifts all boats.
Warren Buffett has said that success in investing is as much or more about temperament than it is about intelligence or expertise. In today’s uncertain market, we believe avoiding panic and cultivating virtues like patience and discipline is of more use than the financial or mathematical jujitsu practiced by Wall Street super geniuses.
Buffett’s right hand man, Charlie Munger once said, discussing the record of Berkshire Hathaway: “If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along you pounced on them with vigor.”
Patience has been on my mind a lot recently. I am waiting for a number of things, not least for my first child to arrive, due on September 10th. Reading a book about parenting I learned that, according to one school of thought at least, cultivating patience in a child from the very beginning provides the underpinning of everything in his or her development from sleep to eating to communication. The book cites a famous study at Stanford in the 1960’s and 70’s where three-year-olds are given a marshmallow and told if they don’t eat it until the adult comes back in a few minutes, they will get another one. Most kids can’t resist. They eat the marshmallow almost immediately. But for the ones who don’t, this display of patience is correlated with all sorts of success in life later on.
Forgoing present gratification for the sake of much greater benefits later is what investing is all about. A recent column by the economist and blogger Tyler Cowan highlighted the larger crisis of impatience in American society. He argued that the discontent among large portions of the electorate today is linked to the retirement crisis and lowered living standard that has resulted from the sharp decline in the saving rate over the last 30 years. This impatience, Cowan notes, is just as much present is public sector—unfunded pensions, fiscal deficits, etc.—as it is in households. As a society we have spent several decades eating the marshmallow.
The study mentioned above found that the children who successfully passed the test were the ones who found some way to distract themselves, twiddling their thumbs or playing a little game. Those who stared at the marshmallow invariably ate it. At O’Brien Greene our way of distracting ourselves from the irrational mood swings of the market is to spend a lot of time on the analysis of individual stocks. We try to understand each business, its management and its industry and evaluate its future cash flows as well as the durability of competitive advantage.
If you really know your stocks, it’s easier to hold on when the market and the media are seized by fear. You know that even in the worst of times people will still do Google searches or drink Coke, and so companies that make these essential products will continue to generate strong cash flow.
I met a guy recently who works at a successful Buffett-style investment firm where he says some research analysts will go for a whole year without recommending a single trade. Some people find it boring, but their performance is very good. The key is during this period of apparent inactivity you need to be actually building up a base of knowledge and an extensive watch list so that you can decisively spring into action when the opportunity finally arises.
When it comes to investing, patience pays. Don’t eat the marshmallow!