Patience, sloth and fairy tales.

Warren Buffett tells us that, “The stock market is a device for transferring money from the impatient to the patient.” He goes further to describe his process, “Benign neglect, bordering on sloth, remains the hallmark  of our investment process.” So, what does that mean to us? Let’s break it down bit by bit.

Yes, I know that this is my first post in a while and I’m just jumping straight into a Buffett quote breakdown. You may be saying, “Why now? What triggered this?” I’ll tell you; I’ve been offline for a while with family responsibilities and the new job has leapt to overdrive. That doesn’t mean I’m not still reading, learning or paying attention though and you should be too. The market is in turmoil, it’s up, it’s down, no one is exactly sure what is going on except that a lot of overvalued companies and instruments are seeing a test. That’s what brought me back with this topic today.

So, if the market is a device for transferring money from the impatient to the patient, what do we learn from the statement. I take it to mean, that if we pick our spots and don’t fall victim to the lure of FOMO or TINA, we will be more successful in the long run. FOMO every is aware of, fear of missing out. TINA is old, but new again, there is no alternative. Next step let’s break them down.

FOMO, no one likes to be the person on the sidelines while the action is going, and their friends look like geniuses for taking positions in growth companies. Hyper growth stocks and instruments are the best of all, they’ll do nothing but go up, break records day after day and return huge profit. That is…if you can rein in the greed and get out at a good time. Ask Bitcoin holders how they fell about that. There are some folks out there who bought at $60,000 and are now looking at half the value gone. There are several hyper-growth companies who are now losing some ground and investors have to either have faith in their decision or are getting very nervous.

The law of falling prices of stocks is that it leads to selling and selling leads to lower prices in a vicious cycle. Ask Long Term Capital Management how that goes…oh wait they went bankrupt because of it. “When Genius Failed” by Roger Lowenstein is a great book and tells the story. Greed kills folks, that’s why Uncle Warren tells us to sell on Greed and buy on Fear. We are the contrarians, the outsiders of today’s market. Why? Because we’ve seen this all before and know how it ends. The bubble bursts, the prices fall and the heroes of today are left in the dirt tomorrow. Remember, people were buying Enron right up to the moment that they declared bankruptcy and the whole scam came apart.

Humans like to say, “This time is different.” Well, I personally believe that this analysis is about the same as blindfolding yourself and hopping off a bridge just knowing that THIS time you’ll grow wings. It’s a nice thought, but the likelihood is so remote that you will spontaneously mutate that you might as well be wishing. This, though continues to be considered a valid investment thesis and as this bull market keeps going the voices get more and more sure. I’m sorry, but if you’re a gambler at heart (note: these folks are) you should see the odds are so stacked against you that it doesn’t bear logic.

So, those folks that you are watching gain money will either get over their greed, cash out and take a good win with a large amount of luck getting them there or they will watch it all melt away because they are greedy. You can argue it if you want, but I will stand by this statement. Who cares if one of the heroes you know get’s out and is lucky, the likelihood is that they will keep trying this emboldened by their success and lose most or all of it later on.

We only need to get 3 or 4 companies right in our lifetime to walk away with more than enough to live comfortably on or even get rich. These are companies that we are confident will grow year over year for the next 10 years to forever. The odds are in our favor.

I would rather sit out of a bad situation where I might luckily gain a bit and have a huge downside, than take that as one of my 3 or 4 wonderful companies. It’s not to say these companies aren’t wonderful even, but that they are not wonderful at today’s prices. Sitting in cash is not the worst thing in the world right now. Because when this bubble bursts…folks like us will take this cash we’ve been sitting on and buy these wonderful companies at a steep discount but unlike our friends who could afford a handful of shares at the current prices, we’ll be backing up the truck to hold our positions.

At this point the second principal comes into play. Benign neglect bordering on sloth. I love this because it is how we should treat these investments. The worst thing you can do after you back up the truck is watch the market every day analyzing every dip and spike to be filled with meaning. We buy dollar bills for 50 cents, so who cares about the day to day. Let the folks who fool themselves into comfort with high frequency trading and day trading worry about that. I want a portfolio that I check maybe twice a year, with one of those times being tax time and the other around annual earnings calls, knowing I paid such an obscenely low amount for the shares that their intrinsic value ensures I’ll make money.

That is a sleep well at night portfolio and what each of us should hope for. If it gets overvalued again in one of your checks or the story changes radically, then we can always sell. Or if there is a better opportunity than what we’re currently in and you’ve done the homework to know it’s a no-brainer decision then go for it. I would rather deploy tactical patience than my capital when it comes to long-term investments.

There are some of you like me who may not have enough capital to really take advantage of this since we look to buy in tranches that represent sizeable portions of our portfolio. Luckily, there are ways to generate the income to get to that position. Depending on where you are in life, that might not even be such a big deal because you have decades until retirement and if you miss the opportunity in the next correction, you’ll be ready the time after it. It works in cycles folks, there are decades of historicals that tell us this. So, patience will win the game.

The tortoise and the hare come to mind here, remember your fairy tales kids. Slow and steady wins the race and never eat off the house made of candy. Let’s all remember what Uncle Warren tells us is backed up by over ¾ of a century of success. I don’t know about your gambling habits, but I’ll take 75% of a 100 with a smile on my face. Till next time, this is Daddicus hunting his dinner.

-Daddicus.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s