Patience

An investment is usually a challenging journey with plenty of ups and downs. Making it particularly difficult is that we do not know what the destination looks like or precisely where we are headed. Sounds contrite, but while pundits like to make bold predictions around precise prices and timeframes, a more useful exercise for me has been to focus on preparing for the journey itself.

The planning fallacy is the tendency where most of us underestimate the time required to complete a task. Our optimism blinds us to the multiple variables which are often out of our control.

Fresh from our holiday travels, I’m learning (slowly) that travelling with young children is made dramatically easier when a fixed timeframe is removed. It allows us to deal with the inevitable toilet stops, food cravings, variable sleep patterns, car sickness (if we’re unlucky) in the moment.

Like investing, a healthy dose of patience brings us to our destination with greater calm and less risk of irrational decisions.

“Blessed is he that expecteth nothing, for he shall not be disappointed,” GK Chesterton

A recap on our strategy

We aim to purchase investments for less than 50% of what we think they are worth. Just to be safe, we prefer net tangible assets owned by the underlying business to cover (at least) what we are paying for it. To maximise our search for these gems, we place no constraint on asset classes, investment type (private or public), region, or size.

While we have no fixed timeframe, experience tells us it takes 3–5 years for the gap between price and value to close. We are willing to wait longer so long as we are confident the value is there.

“We don’t get paid for activity, just for being right. As to how long we’ll wait, we will wait indefinitely.” Warren Buffett

I’m often asked where we find our ideas. Funnily enough, the finding and buying is the easy part of the process. I find the greatest difficulty in the holding (the waiting) and keeping my emotions in check while others disagree with us.

Why is patience easy to say but hard to do?

Patience is one of those characteristics that everyone acknowledges is useful but so few are realistically comfortable delaying gratification. Investors are obsessed with action, we all struggle to sit still. Why is that? I think there are two primary ideas.

a. Investors have a misguided belief that they can predict things — especially timeframes

b. Investors struggle to deal with the emotional impact of volatility

Predicting specific prices (and timeframes) has a huge margin of error

Knowing when a stock will eventually rerate toward its fair value is a question near impossible to answer. What moves share prices in the short term is a vote with many hundreds (if not thousands) of other investors. Knowing how the collective market will feel in any given day or week relies on an accurate understanding of feelings and emotions.

“The market is a voting machine, not a weighing machine. It registers and reflects the thousands upon thousands of personal opinions about tomorrow. It swings high and it swings low on the facts and fancies that move men to investment action” Benjamin Graham

I’m busy trying to handle my own feelings, so to attempting to forecast how thousands of others are going to feel about a specific stock in the near future feels like a fool’s errand. Needless to say, while we do look for catalysts which may assist in shortening an investment’s timeframe, we spend zero time estimating specific timeframes.

“The investor’s chief problem — even his worst enemy — is likely to be himself.” Ben Graham

Getting comfortable with volatility

Investor behaviour plays a big part in the volatility of the market. Loss aversion bias is a big one. We all hate losing money and we all have an urge to sell a stock when it is falling.

The opposite is true of rising prices. As a type of herding behaviour, investor’s pile into investments when everyone else is loving them. The feeling of belonging is a driving force, we are inclined to join/follow our peers and then look to others for confirmation through the process. This is a fuel for rising prices, it helps to create asset bubbles and volatility.

But why do we do this? We all know we should be buying low and selling high. All else being equal, the merit of an investment increases as its price falls — but our emotions force us to feel the opposite.

Being comfortable with the price of your investments falling is a difficult exercise. A study of the best performing investors tells us that extended periods of poor returns is an essential ingredient to outstanding long-term returns (quote from study below).

Volatility represents the collective view of the market. It affects me. It’s hard to imagine it not affecting everyone to some extent. But we know that independent and rational thought is a key determinant of great returns. An idea carries very little merit if it is not (to some extent) different. So like anything worth striving for — learning to deal with volatility is hard. So work on it we must.

“An outperforming manager can expect to experience a continuous drawdown lasting two years or more every 10 years and a drawdown of at least 20 percent over time” Chris Tidmore & Andrew Hun.

Our investments sometimes fall in value — that is a predication destined to be correct

As a contrarian investor, I need to be aware of these fallacies and manage them more than most. The thing about buying cheap stocks is that they are cheap for a reason. Buying a stock that has fallen 70% usually has a good chance of falling further.

The stocks we invest in have (most often) fallen either because no one is looking at them or because some bad news has impacted the sentiment toward them. In other words, the ‘market’ either isn’t aware of the company or disagrees with our thesis (until they begin rising of course).

Investing as a contrarian is difficult, but it works. So we are sticking to it and commit to continuing to improve our craft.

“Sometimes buying early on the way down looks like being wrong, but it isn’t” Seth Klarman

Treating our investments like they are private businesses

Our recent experience investing in private companies has highlighted how detrimental the minute-by-minute pricing mechanism of the ‘stock market’ can be to both investing and management. With our private investments, we do not have the ability to sell quickly. This forces us to think much more strategically and longer term.

Of the many issues businesses face, most are transient. They are fixed and forgotten very quickly. Where listed company issues are exacerbated by a melodramatic stock market, a private company and its investors are allowed to be more focussed and rational. Generally, they just get on with running the business. My recent experience as a board member of one of our investee companies has reinforced the idea that time heals most issues.

“This too shall pass” Abraham Lincoln

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Acknowledgements: GK Chesterton, Warren Buffett, Ben Graham, Howard Marks, Chris Tidmore & Andrew Hun (Patience with Active Performance Cyclicality: It’s Harder Than You Think), Seth Klarman, Abraham Lincoln