Letter to My Daughters: On Patience
I want to talk to you about patience, specifically, patience as an investor. It may be the single most important quality you can develop, and it is also the one that most people, even smart people, find almost impossible to maintain.
The problem is that patience is invisible. When you are being patient, nothing appears to be happening. And in a world where something is always happening–markets moving, headlines rolling, financial commentators confidently explaining what it all means–doing nothing feels like failure.
It isn’t.
Why Patience Is Hard
Human beings are wired for action. When something feels wrong (a market falling, a stock dropping, an economic report that looks alarming), our instinct is to do something. Sell the stock. Move to cash. Wait for things to “settle down.” This instinct served our ancestors well when the threat was a predator or a drought. It serves investors very poorly.
The reason is simple: by the time something feels alarming enough to act on, markets have usually already moved. You are not responding to what is happening; you’re responding to how you feel about what already happened. And acting on that feeling almost always means selling low and, eventually, buying back in high.
I’ve seen this pattern repeat itself for decades, in every market cycle. The investors who earn good long-term returns are rarely the ones who made the right call at the right moment. They are the ones who made a sound decision at the outset and then had the discipline–AND PATIENCE–to stick with it.
What Patience Actually Means
I want to be clear about what I mean by patience, because it’s not the same thing as passivity.
Passive investors buy an index fund and hold it forever, regardless of whether the market is cheap or expensive. That is one approach, and it works reasonably well for many people. But it is not what we do, and it is not what I mean when I say, “patience.”
Patience, in our sense, means this: once you have done the work to identify a good company at a fair price, you give your investment the time it needs to prove you right. You don’t:
- Check the price every day.
- Sell because the stock hasn’t moved in six months.
- Let the market’s short-term judgment substitute for your own well-reasoned long-term judgment.
The market is very good at pricing things in the short run, and not particularly good at it in the long run. We try to take advantage of that. But taking advantage of it requires that you not be in a hurry.
A Word About Timing
You will hear a lot of people talk about “timing the market.” They mean getting out before it falls and back in before it rises. A few people have done this successfully. A very few. And most of them got lucky at least once along the way.
The mathematics of mistimed exits are brutal. If you miss just the ten best days in the market over a twenty-year period (that’s ten days out of roughly 5,000 trading days), your returns are cut nearly in HALF. The problem is that the best days tend to cluster right around the worst days, which is precisely when most nervous investors have already gone to cash.
This doesn’t mean you should be oblivious. If a company you own fundamentally changes–if its business deteriorates, if management acts dishonestly, if the reason you bought it no longer holds–then selling is right. But that decision should come from your analysis, not from the market’s noise.
The Hardest Part
Here is the truth: patience is hardest when you need it most. When everything feels uncertain, when markets are falling, when every headline says things are getting worse, that is when the temptation to act is strongest, and when acting is most likely to hurt you.
What helps is having a process you trust. At Muhlenkamp, we spend a great deal of time evaluating businesses: their profitability, their balance sheets, and their valuations relative to what we are paying for them. When we own a company, we own it because we believe it is worth more than its current price. A falling price does not change that analysis. It may actually improve it.
The investors I admire most are the ones who can hold a sound conviction calmly, even when the world is telling them they’re wrong. That quality is what separates good long-term results from poor ones. It’s more than intelligence, more than information, more than financial sophistication. And it takes practice. It takes humility. And it takes patience.
Love, Dad.
The opinions expressed are those of Anthony Muhlenkamp and are not intended to forecast future events, guarantee future results, or offer investment advice. Investing involves risk. Principal loss is possible.
