Hello friends,
Welcome to everyone that signed up during the past week. In todays discussion, we will be examining the most common investing mistake that we have come across throughout our investing career. We believe that using an inverted approach of what not to do, can be very helpful to our readers and instructive in our decision-making going forward. Today’s common investing mistake is impatience.
Listen to this newsletter:
“The stock market is a device which transfers money from the impatient to the patient.” - Warren Buffet
Hyper-activity
The game is rigged from the start. The stock market, by its nature, does not incentivize the long-term ownership of securities. The stock market generally exists to allow for the trading of fractionalized shares, daily, with the click of a button, BUY or SELL. Gamified investing apps like Robinhood encourage trading through reward animations commonly associated with gambling operations and by showcasing a trending stocks list, often emphasizing the stocks with the highest volatility.
Financial news media further reinforces short-term thinking through its 24/7 news cycle, bold headlines, and stock picks. (Remember, their incentive is to capture and hold your attention, not to make you money). With the ease of trading stocks online and the constant “do something” messaging from financial media outlets, it is not surprising that so many investors overtrade based on short-term news.
This short-termism is in direct opposition to the nature of equity. If you own a 20% interest in a rental building, the ownership claim is permanently yours (as long as the building stands). The asset is there to produce earnings for you as long as it physically can. Chances are, you wouldn’t look up a quoted value for your equity at 10am on a Monday, check again at 12pm, and again at 3pm. As absurd as this sounds, it is what many investors do with their public equities since stock price movements are constantly updated and easily tracked. This is purely non-productive behavior, especially when there is no desire to sell.
“Investors have never really reconciled their ability to trade daily with the permanence of equity.”- Nick Sleep
What’s the Rush?
Another example of impatience commonly occurs during the buying process. Before making an investment, it is common practice to conduct due diligence. How much due diligence is necessary varies depending on the investor and the business in question. However, it is common for stock investors to rush the due diligence process. This is most notable when compared to other forms of investment.
Imagine that you were approached at a cocktail party by a restauranter who made an offer to sell you one of his best-performing restaurants. How much due diligence would be required to come to an informed decision? In all likelihood, you would have many questions before committing to an investment. Some of these questions would involve intricate details regarding the current staff, menu, customers, square footage, supplier agreements, location, pricing etc. Maybe you would even silently question the sellers’ motives. (If this restaurant is so great, then why do you want to sell?)
Now, compare this to the buying process investors engage in with respect to public equities. Imagine, at the same cocktail party, you were approached by a partygoer and told about a biotech company that is set to change the world with their new drug. He further informs you of how much money he has already made from their stock and how it’s the opportunity of a lifetime. How much due diligence would you need to make a sound investment in this opportunity? You shouldn’t be shocked to hear that many investors would be inclined to purchase shares the very next day. (Ironically by investors who have no experience with biotech but commonly visit restaurants).
Concluding Thoughts
Here are some tips that I have found useful in mitigating impatience during the investing process:
Stop the daily check in with your portfolio. If you are not looking to sell your shares, tracking daily stock prices is fulfilling an emotional need, not a rational one.
Reduce your buying/selling activity. At the time of purchase, write down the top reasons you are buying a business and look to the business results (not stock price) to ensure your investment thesis is intact.
Make rules for yourself to avoid impatience. The three-year rule states that you should not sell an investment for at least three years from the purchase date, assuming the business fundamentals are intact. Self-enforcing this rule leads to greater levels of due diligence and promotes long-term thinking.
Thanks for reading!
I hope this discussion has been useful for you. If it has, please feel free to share with a friend. All feedback is welcomed.
Graciously,
Jack Beiro, MBA
Edited by Rob Cortinas
The information contained herein represents the author’s opinion and is for informational purposes only. Nothing in this newsletter should be construed as legal, tax, investment, or financial advice. No opinion expressed by the author should be construed as a specific inducement to make a particular investment or follow a particular strategy. The author may hold positions in securities mentioned in the newsletter and may buy or sell securities at any time. The author may express opinions based on information he considers reliable, but no guarantee or warranty is made with respect to such information’s completeness or accuracy, and the author is under no obligation to update or correct any information provided. Please consult your own financial or investment advisor before acting on any information provided herein.