This is the second part of my 10 part series on the tenets of my investment philosophy. I believe that investing without a game plan is equivalent to a baseball player swinging with his eyes closed. Sometimes contact will be made, but not having a game plan makes the at bat that much harder. I’ve sent up a Tenets of Investing page where you can click to check out all 10 of my tenets. And just to screw with you guys, I’m going to write about them in a random order.
When it comes to a lot of things in real life, I’m not very patient. I get bored when I have to wait for things to start. I get angry when the person driving in front of me is going too slow. One thing people have always teased me about is my impatience.
For some reason, when it comes to investing I can be incredibly patient. I’m more than happy to wait in the wings, putting my cash in money market accounts and just sitting tight for the right opportunity. When an opportunity presents itself, I’m ready to go.
When I get in trouble as a value investor, it’s when I buy something on the way down thinking the bottom is very near. Like many other investors, I look at how much the stock is down from its high, convince myself it can’t possibly go down anymore, pick some up, and promptly watch it go down some more.
While I believe it’s a sucker’s bet to try to consistently time the market, an investor needs to buy a company when it’s cheap. Look at the 10 year chart. Is the company trading at the bottom of their 10 year range? If they are, find out why. Either a company has been unfairly punished by the market or there’s something legitimately wrong with it.
The beauty of buying something when the present looks the most bleak is when the future becomes a bit more rosy, the stock reacts with a nice move very quickly. For the people who have held it for years and watched 75% of the value erode away it’s a bittersweet move, yet if you bought close to the bottom you are laughing.
The point of exercising patience isn’t buying companies simply because they’re the cheapest they’ve been in years. What you want to do is buy companies that have a track record of doing things right at the cheapest price possible.
Or, do it another way. Identify companies you want to buy, companies maybe you believe have that special competitive advantage you really like as an investor. Then look at the 5 or 10 year chart and vow not to buy that company unless it gets to close to that low point. Only buy it then.
Being patient is one way to maximize your investment returns. If you invest like this, often you’ll sit on a stock for years before it does much. That’s okay if you’re buying beaten up names and hoping for a 100-400% return. If you’re looking for 5-10%, this probably isn’t the method for you.