Common Sense, Patience and Discipline

Individual investors today are somewhat gun shy of the stock market. They feel that the “game” is rigged against them and they have no chance of being a successful investor. It is really hard to blame them for feeling that way when in the last 14 years they have seen two devastating declines that effectively wiped out 40 to 50% of their portfolio values. Headlines are full of tale so insider dealing and high frequency trading that move markets in a manner to which individuals are not accustomed. More than one person in recent years has compared the stock market to one giant casino where the house has the edge and conspires to relieve individuals of their money. It is easy to see how one could feel that way. If you look at the financial media you have many of the same aspects of a casino. There are touts sheets suggesting the right way to play the game and offering potential short term winning picks. There is a certain amount of cheerleading with many newscasters filling the role of casino host in helping to get your money into the game. Brokers often act as little more than bookies in urging investors to trade and transact at a frequent rate. There are huge pool so of money pushing the market around using computers and higher math just like you find in sports betting circle and racetracks all over the world. The truth is that if you get sucked into the short term game you are at an immediate disadvantage. You r are playing someone elses game on their terms and you will most likely lose. There is an enormous amount of money to be made investing in stocks but to find the profits you have to avoid doing what everyone else is doing. It requires the application of commons sense, patience and discipline in the face of an environment that discourages the application of all three. If you look at those who have made fortunes by actually investing in common stocks rather than just charging fees to facilitate activity you find that most of them did the exact opposite of conventional wisdom. They were not betting on growth rates and stocks stories but buying businesses at very attractive prices and holding them for extended periods of time. Investors like Warren Buffett, Carl Icahn and Wilbur Ross do not buy stocks in anticipation of the next quarterly earnings report of rumored new product release. They buy into business when they are on sale because of negative perceptions and the company, the market or the sector and hold onto them until they are once again popular. It is just good basic common sense to buy stocks when they are on sale and sell them as they are hitting new highs but the vast majority of individual investors do exactly the opposite. It requires patience to sit and wait for opportunities in the stock market. When markets are hitting new highs and everyone is excited about buying the hot stocks of the day it can be very difficult to sit on your hands and not join the euphoric rush to buy at any price. You can even begin to feel foolish when you sell stocks at their fair value and it continues to ride a momentum wave higher. It also requires a great deal of patience to wait for a stocks full value to be realized. The market in the short run can very much be a popularity contest but eventually the value of a company will be fully realized. It may take six months or it can take six years and investors must learn to be patient owners of businesses rather than frenetic traders of stocks. It also requires extraordinary discipline to wait for a stock to be sufficiently undervalued to qualify for purchase. When a stock finally trades at a deep enough discount o asset value or earning power it is usually quite unpopular and unloved by most other investors. When a market or sector reaches the point of maximum pessimism most others are selling and getting out of the market. You have to have a great deal of discipline to act against the crowd in falling markets. Buying amidst wide spread negativity requires a great deal of discipline but a look at the result from buying REITs in 2009, bank stocks in 2010 or shipping stocks in 2012 can give you some idea of just how well discipline and patience can pay. You can pay the game Wall Street wants you to play but that game is rigged against you. As the great horse speculator Pittsburgh Phil once pointed out “A man who plays the races successfully must have opinions of his own and the strength to stick to them no matter what he hears.” That advice also applies to the markets. If you do what everyone else is doing and what the brokers and pundits are encouraging you to do, you are not likely to be a wining investor. Applying common sense, patience and discipline is a much surer path to long investing success.