Warren Buffett has said, “Successful Investing Takes time, Discipline and Patience”
“Value investor don’t believe in getting rich quick…instead they believe in getting rich wisely.”
Let’s understand about patience in investing and how it can grow your money.
Patience is defined as “The capacity to accept or tolerate delay, trouble, or suffering without getting angry or upset.”
Who’s your worst enemy?
Benjamin Graham, the father of value investing, once said, “The investor’s chief problem — even his worst enemy — is likely to be himself.” As financial advisers, we play many key roles in the lives of our clients, but one of the most important is helping our clients to stay focused on the long-term game plan. All of the work we do in terms of research, allocation, diversification, risk management, cash management, etc., is meaningless if investors lose sight of their long-term investment goals.
The investing world turns into a madhouse whenever the market fluctuates, for example volatility was seen during various scenarios like ‘Brexit’, demonitisation, etc. If you’re a value investor then that means you’ve done your research and should stick to your long-term strategy. One of the most intelligent investors, Warren Buffett, explains it: “Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years.”
In my experience it just comes down to few points that one should remember and I am outlining how to build a value investing strategy that’s based on patience with 3 key factors:
- Contrarian Investor
Think differently is a very generic and wide term and has many interpretations. Today we will discuss this term with regards to the ability to think in a contrarian manner.
Being contrarian means simply not to follow the Crowd. Be yourself and find your own way. Contrarian investing approach involves going against the herd. It advocates buying when most investors are selling in panic during market crashes or slowdown and selling when there is euphoria or Bull Run in the market.
Contrarian investors believe that if many people are buying a company’s shares, something bad will happen soon.
For example, they think there will soon be overbuying. If there is overbuying, the shares will stop reflecting the actual strength of the company. Subsequently, the share price will fall.
Contrarian investing also refers to buying stocks when there is widespread pessimism in the market.
As Benjamin Graham Says…
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Patience is the real virtue of good investing. Take time and follow the correct research process. Many investors will only look at a company’s revenue growth, PAT growth and Margins to make their decision, but there are other important factors to consider. We recommend the 3-dimensional approaches to value investing research. These approaches are: Fundamental Analysis, Valuation and Timing.
Fundamental Analysis: Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial or other qualitative and quantitative dimension of the business. While financials will reveal history of the business and financial readiness to grow in the future, evaluating factors such as the economic conditions favourable to the business, the ability of the management to identify and exploit opportunities, the operating efficiencies that the business possesses and the risks that may affect the plans and its ability to meet these contingencies, will define the attractiveness of the business as an investment proposition. Accordingly, the fundamental analysis including following:
Valuation: The process of calculating the fair market value of a stock by using a predetermined formula that factors in various economic indicators. Stock valuation can be calculated using a number of different methods. The most common methods used are the discounted cash flow method, the P/E method, and the Gordon model. Whichever method is chosen must be done accurately so that the price of the stock can be valued properly.
Timing: If you are buying any stock you should take a time horizon for beyond 5 years and in between if this stock goes down by 15 to 30% during the holding period. At that time you have to not lose your patience because if you have strong conviction in a stock than you won’t worry about short-term fluctuations.
In 2015, suppose a person bought this stock for Rs. 46, but after seven months the stock goes down by 37% and remains at same price for a year. In this situation if that person panics and sell the stock, then the return would have been negative. If he would have kept conviction and hold it with long term prospective then he would have earned 8 times return.
It is difficult to know with certainty how long it will take for an attractively priced asset to appreciate towards its fair value, however, as long-term investors, we are prepared to wait patiently for this to happen.
So the focus of this lesson, is dedicated to holding great growth stocks, is on practising patience in your stock investing. Many times, the stocks you purchase don’t do an awful lot for many weeks after your initial purchase. But if you have the guts to stick with those stocks, some can turn out to be huge winders. And in the end, those big winners are the once that makes all the difference.
Diversification is the act of, or the result of, achieving variety. Investment diversification includes a variety of asset classes, asset categories, and individual investments.
Investment Diversification Purpose:
The purpose of investment diversification is to reduce unsystematic risk. You have heard the expression “don’t put all your eggs in one basket”. If you own only one asset category or one individual stock, you will be exposing your portfolio to great harm.
Unsystematic risk can be nearly eliminated through investment diversification. Unsystematic risk is specific to an individual investment or industry and is not correlated with the market. Therefore if you don’t participate in diversification you are taking an unnecessary risk that you will not be compensated for.
- Diversification can help manage risk.
- You may avoid costly mistakes by adopting a risk level you can live with.
- Rebalancing is a key to maintaining risk levels over time.
A long-term investor is aware that volatility and bumps in the road will occur, but he should maintain patience just like a farmer. You don’t see farmers rushing to dig up their planted seeds every time the weather man predicts a storm. Instead, farmers have patience and know that the sun will shine again and their crops will grow. By planning ahead and saving early for your goals, you can avoid excess investment risk and undue stress later in life.
As Warren Buffett once said…
“Someone’s sitting in the shade today, because someone planted a tree long ago.”
It is never too late to start investing, but the earlier, the better. If you want to enjoy the shade of a big tree, you need to plant the seed today!
“BE PATIENT AND STAY ON THE PITCH”
Source: NISM Module ; www.stride.ws