Is Patience the greatest virtue in investing?

There are many virtues that make us better investors. These include perseverance, diligence, wisdom, courage, humility, and prudence. But there is one virtue that stands out as absolutely essential, and that is patience.

Cato the Elder, a statesman of ancient Rome, described patience as ‘the greatest of all virtues’, and if applied to investing, he is probably right.

Patience is the ability to accept delays or misfortune without becoming annoyed or anxious. It’s the showing of self-control and tolerance when under strain. And it’s the ability to wait for long periods of time without becoming bored.

The magic of compounding

Patience allows the magic of compounding to work. Compounding occurs when an investor reinvests their dividends, thus creating even more dividends the following year.

Compounding can also occur within companies, where earnings are retained by the company to reinvest in growth initiatives that enable higher earnings in the following years. Hence companies too can become compounding machines.

According to Vanguard, over the last 30 years Australian shares have returned on average 9.7% (including dividends). US shares have performed slightly better returning 10.8% over the same period.

When combining long periods of time with great average returns, compounding will wield its magic, producing extraordinary results. This is why Charlie Munger said, ‘The first rule of compounding is to never interrupt it unnecessarily’.

The causes of impatience

It’s patience that helps you as an investor, but many find it difficult to wait. One of the main reasons for this is the impact of emotions, especially fear and greed.

When markets fall, the fear of loss, can often overwhelm people and cause them to sell. This interrupts the compounding effect, but also results in the person missing out on the inevitable market rebound.

In a similar way, when markets rise, greed can often become a factor, and some will constantly change their portfolios around in search of greater gains. Buffett calls this, ‘flittering from flower to flower’, and the end result is that it interrupts the compounding effect, increases brokerage fees, and brings forward capital gains tax.

Action Bias

Another reason for investor impatience is the Action Bias, or ‘Do Something Syndrome’. This is our natural desire to act when inaction is the better option.

In 2007, psychologist Michael Bar-Eli studied 286 soccer penalty kicks and the movements of elite goalkeepers. He concluded that when a kick is made, the optimal strategy for the goalkeeper is to stay in the centre of the goals (as the ball is frequently kicked there). However by and large, goalkeepers will always leap one way or the other, because it feels better for them to act.

The herding instinct is another bias that can cause us to sell our investments prematurely. When the market is tanking and people are running for the exits, our natural herding instinct can cause us to run for the exits too.

Practising patience

Patience is a huge help for an investor, and fortunately patience is something that can be learned. Here are five ways:

1. Practise it. The more we practise patience, the more patient we become.
2. Study stock market history. Learn about the booms and busts in the market, and see that on every occasion, market falls are followed by new highs.
3. Study the maths. Realise that good returns compounded over a long period of time, produces excellent results.
4. Biases and Emotions. Familiarise yourself with the biases and emotions that can lead us to be impatient.
5. Accept volatility. Realise that the stock market has a long history of volatility and accept these movements without being too anxious.