The importance of being idle: Part 1 – the power of patience for the DIY investor
It’s a Saturday Night and needless to say there is nothing bearable to watch on TV, so I thought I could spend an hour or so creating a draft of a new blog idea I have had kicking around for a while.
As it played out, I looked through my list of possible blogs to make a start on and nothing was really leaping out at me although I remembered an idea I had recently to do one about the importance of being patient – and because it is something I profoundly think could help many readers hugely I decided it would be quite an ‘exciting’ thing to write (that gives you an idea of how dull the garbage on the TV tonight is!).
I am bemoaning the TV there but in truth I must just sing the praises of that ‘James May’s Toy Stories’ series which was first shown on the Beeb perhaps 3 years ago or around that but it has been recently repeated on something like the Discovery Channel and tonight while I was troffing my curry they had the one where his team of genius engineers (basically a chap called ‘Simmy’ really) build a motorbike and sidecar out of Meccano and then attempt to ‘race’ it around the Isle of Man TT course (I say ‘race’, but in truth it only does something like 7 mph).
This is all relevant because the ‘skill’ of patience is written all over this utterly insane challenge and obviously applies to the painstaking and presumably utterly tedious task of creating the bike out of thousands of tiny pieces of Meccano and their associated tiny nuts & bolts and washers and stuff but also because so much of it had to be machined to make items like a final drive chain and an incredibly complex wheel (well, 3 of them in fact).
So, immense patience was needed in the construction but also James May and Oz Clarke needed limitless patience in riding the damned thing so slowly but also for the many repairs and adjustments and of course the police outriders and members of the public needed buckets of patience as the cars tailed back for 4 miles behind the bike!
Where was I? Oh, yeah, patience. Before I leave James May, might I add that Meccano was invented by Frank Hornby in 1898 and hence another stock connection to the rather troubled company of the same name with the Ticker HRN.
‘Robbie Burns, The Naked Trader, has large reserves of patience and he often mentions this in his books’
Back on investing, it often strikes me that Robbie Burns, The Naked Trader, has large reserves of patience and he often mentions this in his books and on his website etc. Clearly this has helped him to hold on to some incredible multi-bagger winners like GB Group (GBG) and Accesso Technologies (ACSO) (which he had originally as LOQ and has held for years so he must have made a mint on it) and of course he has held Telecom Plus (TEP) forever partly because he is a distributor but he mentioned many years ago that he got a dividend each year which was something nuts like £35k a year – even back then!
I also remember listening to the excellent Steve Markus @smarkus on a Podcast he recorded with @Conkers3 where he said something along the lines of ‘If in doubt, do nowt’ which very much is the essence of patience and I think far too often people tinker with their portfolios and think of ‘excuses’ to take a particular course of action when really it is a psychological inability to damp down their overwhelming urge to ‘do something’ – it is a drawback of our primitive monkey brains that we always feel that we should be active and doing stuff to our portfolios when in truth the best thing we could do is just leave it alone!
I picked up the phrase ‘studious inactivity’ from somewhere and I think that sums up the application of patience a treat.
You can listen to Steve’s Podcast here:
Why Patience is important
I often think that patience is an extremely underrated ‘skill’ for long term investors (note, I have deliberately mentioned ‘long term investors’- what I am talking about here only applies to a small extent to short term traders who will have a requirement for patience in how they do things but are often in a situation where decisions need to be made very fast and the ability to make quick and generally correct decisions is essential.
‘a drawback of our primitive monkey brains that we always feel that we should be active’
I doubt many people are actually capable of this) and although I have been quite blessed in terms of my own levels of patience (except for when anything related to IT goes wrong – I have no idea why but it just totally flips me out in seconds and it’s a strange side to my character. Perhaps this IT glitches hate is an antidote to my normally calm and patient demeanour – a ‘safety valve’ which boosts my patience otherwise!).
I am not sure that I really understood how important patience was in the past.
Generally in life I have always been pretty calm and patient and thoughtful and my motorcycle accident in 1998 which left me paralysed from the chest down and a permanent wheelchair user forced an unbelievably high level of patience upon me and I have little choice but to accept that many of the most basic things in life can take an absurd amount of time.
For instance, if you are able-bodied then you can pull up at your destination in your car and switch off the engine and grab your fone and the keys and open the door and get out of your cr in mere seconds.
For me, such an exercise probably takes at least 5 minutes and involves building up 4 components of my wheelchair which can be quite fiddly and lifting myself by my arms out of the car and into the chair etc.
‘I am not sure that I really understood how important patience was in the past’
It is a frustrating process very often and especially when you get caught in heavy rain – that is annoying; the bottom line though is that I have no choice and I just have to accept it and if you try to fight it you will be driven nuts.
But the upside of course is that this perhaps helps me exploit a very high level of patience when it comes to my investing.
For the vast majority of my investing years I have always bought into the idea that patience was important but I think in reality I was simply trotting out a line and had never really thought about it in the way that I have in more recent years and it is only when forcing myself to write a blog like this that I really am obliged to confront the subject of patience properly and the more I write, the more I realise/appreciate how it can help me.
I think it is fair to say that in the past I paid ‘lip-service’ to the concept of patience but certainly didn’t exploit it in an overt and deliberate way – if I did demonstrate patience then it was probably more by accident (or lethargy/laziness) than by a conscious and deliberate design. Damned shame really because I am sure it would have helped me in my earlier years!
As I see it, the ability to recognise and exploit your own personal reservoir of patience can provide the following benefits for a long term investor (some of this could apply to traders):
- Run your Winners – One of the most important concepts for long term investors is to ‘Run your Winners’ – if you are someone who lacks patience and always needs the excitement of buying and selling stocks then you are highly likely to sell your great long term stocks too early and of course you can never have a proper multi-bagger (200%, 300%, 400% gains etc.) if you always chop the legs off your stocks when they are up 40%. If you are patient and more relaxed then you are much more likely to hang onto your great quality stocks with a very firm grip and to accept the ebbs and flows of the market. This is something I have only really begun to appreciate and understand more in recent years and I most definitely take the view that my biggest error of all time is to have sold superb stocks way too early. I address this by topslicing rather than selling the whole lot now.
- Lower Dealing Costs – The obvious implication of what I have just written in the bullet point above is that if you can hang on to your great quality stocks for longer then your dealing fees will be lower. Actually, it is more than that – we are really talking about dealing ‘costs’ – it is not just fees but also the buy/sell spread and things like stamp duty – these may seem small but if you trade in and out a lot they soon mount up and act as a drag on your portfolio’s yearly returns. Obviously lower costs equates to higher portfolio returns (and remember the power of compounding and how small amounts now can multiply to become very large amounts in the future). Look at it another way, if you are looking to make 15% a year on your portfolio, it is going to be a lot harder if you have dealing fees that add up to maybe 5% or more of your portfolio – if you over-trade then this is very possible. I have not done a scientific investigation or anything and it will vary on the value of your portfolio and who your broker is etc., but I would guess that dealing fees around 2% or 3% a year must be easily possible or even less.
- Dividends – This hanging onto your stocks thing also has the enormous benefit of exposing you to dividend payments. Again, this is something that I think many people fail to fully exploit – and in essence it is ‘FREE MONEY’ (that had to go in Capitals because I love my Divvys so so much!). For me this is in fact a very simple equation – I simply target 10% annual return on my Trading ISA and I suspect that the dividends alone probably amount to 3%. On that basis, if I in effect already have a head start of 3% then that is a big chunk of my yearly target pretty much in the bag – I only need to worry about the other 7%. Obviously for my Income Portfolio (details on both my portfolios and the stocks in them can be found on my ‘Portfolios’ page) the dividend element is even larger and I target a dividend yield of 5% on that portfolio with a total return of 7% a year, but achieved with a lower level of risk and a high degree of inactivity.
- Stress and Worry Avoidance – An approach to long term investing which incorporates a high degree of patience also has a side benefit of being much more relaxing. This to me is extremely important because I am someone who utterly detests and actively avoids stress (this is perhaps why I am so calm – it comes from my Mum I think as she is unfazed by anything – I certainly don’t get it from my Dad who had a fuse shorter that a gnat’s todger) and this in turn might actually mean more considered and rational decisions which of course is essential for investing and trading. I have been re-reading Robbie Burn’s ‘Trade like a Shark’ again in recent days and the theme that keeps coming up is how we need to be Mr Spock like and robotic – this certainly chimes with being unstressed and calm.
- Work / Life Balance – The approach I use to long term investing is something I developed over many years when I used to work full-time. Because the job had periods of extreme activity and other periods of not a lot to do, I needed an approach which meant that I could leave my portfolio largely ignored for many days on the trot sometimes but then I would have time when things were quieter to put more focus on my stocks. I suspect that a large chunk of readers are in a similar situation to this and it certainly makes sense to cultivate an approach that fits nicely around your work commitments but also delivers pretty good returns. Of course now I don’t work but one of the reasons I ‘retired’ 9 years ago was to use my life doing things I wanted to do a lot more than burning my life slaving away for a huge bureaucracy that quite simply couldn’t really give a damn about me and I could have been replaced no doubt with the alteration of a formula in a spreadsheet! This desire for a better ‘work/life balance’ means that by the time we get to a Friday (and quite often a Thursday !!) I have lost interest in the stock markets and I want to be down the pub ‘working’ from there in the form of probably meeting up with some investing mates and chatting about various aspects of investment and individual stocks but also just relaxing in the sunshine! So my relaxed and patient approach is nicely suited to my lifestyle as well – I have a total aversion to ‘screen watching’ and just don’t want to be doing it.
To enable this relaxing and ‘free’ life, my focus these days is on holding a diverse portfolio of quality stocks and making fewer buy and sell decisions but each stock must bring something to the ‘portfolio party’ – be that in terms of income, growth, stability, diversification, sector exposure etc.
I emphasise quality stocks here because if you buy more junky stuff, then you can probably forget about patience and the key skill you need will be luck!
‘my focus these days is on holding a diverse portfolio of quality stocks and making fewer buy and sell decisions’
Wheelie bin Stocks need lots of effort and focus and if you are not able or prepared to put in the time, then you simply should keep well away.
I often say that as investors / traders we nearly all start off precisely the wrong way – the common mistake is that when we begin we buy as much AIM garbage as we can but it is only once we have had our rears kicked hard lots of times that we realise that buying quality stocks is a much better way if we have loads of other distractions in our lives (sadly many people get so disillusioned that they give up altogether).
It is such a shame that we don’t do it the other way around – we should start off learning the ropes with quality stocks and then go to the more speculative junky stuff when we are much more experienced. It is like learning to drive but having your first lessons on the motorway!
It has taken me a while but I have got my ‘normal’ ISA down to 40 Stocks now and that in itself instils a lot of useful discipline which helps the patience side of things and in my Income Portfolio I hold 12 stocks at the moment but ultimately I am prepared to take that up to 15 stocks as a maximum.
With the income portfolio I really take the patience thing to an extreme and I think so far in 2018 (it is June at the time of writing) I have only done one trade in this portfolio!
‘that in itself instils a lot of useful discipline which helps the patience side of things’
Allied to having a diverse portfolio of quality stocks, another importance aspect is to get in the habit of ‘thinking ahead’. If you have a set of rules for your portfolio which pre-determine what action you should take in certain circumstances then this helps things (for example, if a stock has a profit warning then sell the holding or something like ‘sell half if your stockdoubles’, that sort of thing).
In terms of thinking ahead, it is pretty well-known that the winter is the best time of the year for stocks and that summer is usually pretty hard going – so aim to lower your exposure as we go into the summer and be prepared to buy if we get a good sell-off in the autumn which is quite normal.<
Thinking ahead buys you time – it is very rare that a decision for an investor has to be instantaneous and a snap decision – if you are doing this, then you are probably making a mistake.
That’s it for Part 1 – the next bit goes into particular instances where a high level of patience is a big help.
At the time of writing this we are going through a very painful week on the markets and this is clearly a time when the ability to be patient and to ride out the pain is extremely important for long term investors – the worst thing you can do is to get spooked out of quality stocks.
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