- 1 We Have Met The Enemy And He Is Us
- 2 Do You Seek Instant Gratification With Your Investments?
- 3 Buffett's And Munger's Degree Of Patience
- 4 Pretend Buying A Stock Is Difficult
- 5 Be Fearful When Others Are Greedy And Greedy When Others Are Fearful
- 6 Applying The Patience Wealth-Building Habit of Self-Made Millionaires - Final Thoughts
In my recent Wealth-Building Habits of Self-Made Millionaires post, I list the findings by Thomas J Stanley, Ph.D., Sarah Stanley Fallaw, Ph.D., and Thomas C. Corley after several years of research. The post also includes the US and Canadian wealth distribution statistics. These statistics strongly support the findings that most people struggle in applying these wealth-building habits. My personal observations suggest applying the patience wealth-building habit of self-made millionaires might be one of the primary challenges.
We Have Met The Enemy And He Is Us
The delivery of real-time stock-market quotations has to rank very near the top of the investor 'enemies' short-list.
I KNOW people frequently monitor stock market quotes. The proliferation of day-traders confirms this. The instantaneous access to stock market quotations essentially turns otherwise intelligent investors into short-term traders.
Do You Seek Instant Gratification With Your Investments?
Self-made millionaires typically do not seek instant gratification with their investments. Their short, medium and long-term investment timeframes differ from that of most people; a long-term investment timeframe for them is certainly not a week or a month!
Self-made millionaires who own successful businesses have a business plan which addresses these 3 timeframes. It is unlikely the active purchase and sale of a business form part of the business plan. The business plan, however, may include the sale of the business or the purchase of additional businesses several years into the future.
A shareholder holds a fractional ownership interest in a business. A long-term investment timeframe, therefore, should be taken when acquiring shares. The long-term should be viewed from the perspective of a minimum of 10 years.
Buffett's And Munger's Degree Of Patience
In his 1996 Letter to Berkshire Hathaway shareholders, Warren Buffett indicates buying a stock should follow the same kind of rigorous analysis as buying a business.
'To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices.
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.'
In short, invest only in businesses you would like to own yourself.
Buffett further states in his 1987 Letter to Berkshire Hathaway shareholders:
'Whenever Charlie and I buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases, discussed later) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts - not as market analysts, not as macroeconomic analysts, and not even as security analysts.
Our approach makes an active trading market useful since it periodically presents us with mouth-watering opportunities. But by no means is it essential: a prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on World Book or Fechheimer. Eventually, our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial or total.'
Pretend Buying A Stock Is Difficult
Suppose a stock purchase or sale is far more difficult than just a few clicks on an online trading platform. Pretend you are required to travel over a long distance by canoe and the trip entails many portages. Let's add another degree of difficulty. The destination from which stocks are purchased or sold is only open one day per year. This would certainly impact the stock selection process.
The frequent purchase and sale of stocks occur because it is so easy. The degree of thought put into the investment's profit-generating ability and underlying business model increases exponentially if the purchase or sale process is a burden.
Many investors refer to the Financial Crisis of 2008 - 2009 or the brief March 2020 market pullback as terrible events. Falling stock prices, however, are a signal of irrational pessimism when a well-diversified pool of shares in high-quality companies is owned during periods of turmoil. This is certainly evident when a company's share price declines but earnings continue to grow.
Be Fearful When Others Are Greedy And Greedy When Others Are Fearful
Applying the patience wealth-building habit of self-made millionaires means:
'Be fearful when others are greedy and greedy when others are fearful.'
This is what Buffett and Munger advocate and they have a few commas in their Net Worth value. It pays to heed their advice!
In my opinion, we are currently witnessing a period of greed. I am, therefore, in no rush to add to my position in high-quality companies which have a bright long-term outlook. A broad-market pullback is likely to occur at which time I intend to become less fearful.
Applying The Patience Wealth-Building Habit of Self-Made Millionaires - Final Thoughts
I believe real-time market quotations are appropriate for speculators but are the enemy of investors.
Many investors watched the value of their investments plummet in March 2020 and realized their risk tolerance is far less than assumed. They bailed and crystallized their losses, vowing never to invest in equities again. Imagine if these investors had not known the stock price of their investments. There is a possibility their investments would have fully recovered the temporary loss in value.
Fast forward to the present. Some of these very same investors might be a segment of investors who have put more money into stocks in the last 5 months than the previous 12 years combined.
Even more worrisome is these very same investors might be part of the group contributing to the unprecedented levels of Debit Balances in Securities Margin Accounts.
I fully appreciate instant gratification is important in some aspects of life. Instant gratification when it comes to investing, however, is not appropriate. Entry into the relatively small group of self-made millionaires becomes increasingly difficult when the patience wealth-building habit is ignored.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. You should not make any investment decision without conducting your research and due diligence.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with the company mentioned in this article.