One of the most difficult behavioral problems is the lack of patience. In the investment world this becomes even more difficult. When I was employed by one of the major wire houses, a senior broker once told me that the markets can remain irrational longer than the client can stay patient. Over the years, our estimate of “standard client patience time,” to coin a phrase, has been 3 years in normal conditions. Patience can be up to a year shorter than that in extreme cases: relationships and timing, or other startups have proven to be unfortunate. For example, 2.5 years of bad performance after five good ones is usually tolerable. But 2.5 bad years from startup, even though your previous five good years are well-known but helped someone else, is absolutely not the same thing! With good luck on starting good personal relationships, and decent relative performance, a client’s patience can be a year longer than 3 years or even two years longer in exceptional cases.
History has shown us that the great investors exhibited a standard of patience which was infinite. In fact, the track records of the most successful investors that practice infinite patience have the best performance. I’m always interested when someone like Mr. Buffett states that when he is investing, he is looking at where his investments will be 3 to 5 years from now, not the next quarterly statement. The investor today, with access to infinite information from TV, the Internet and various newsletters, suffers from what I call “information overflow” which clouds his judgment on how and in what he should invest. We can all remember the days of the day trader where a long-term hold was less than an hour.
The market during the first quarter of this year gave us returns that most of us would have been happy with over a 12-month period, instead of three. Now as we wrap up the quarterly earnings season, we realize that observations being spread around by the media–sources of a weak economy, continued European problems and low and extended unemployment levels—may, and probably are, out of touch with the real economy. What is keeping me up at night as a wealth manager is: clients overreacting to a normal soft patch in the markets which is typical in May, and their fears of what happened last year with markets heading down in the summer but coming back to breakeven by year’s end. Last year had a completely different set of problems than this year; therefore, my observation is that after a record-setting first quarter the markets are due for consolidation, not the extreme volatility that we experienced in 2011.
To summarize, patience is the key phrase and taking advantage of any consolidation-driven pullbacks is a buying opportunity. Just think how many unguided investors lost their patience last year, getting out at the bottom, only to see the markets breaking even for the year.
Thanks for reading. Call me with any questions or concerns.