Patience Investing

To us, there is no such thing call value investing. Investing by the very nature of investing should be value investing. Warren Buffett in his 1992 Letter to the Shareholders of Berkshire Hathaway mentioned:

“… we think the very term ‘value investing’ is redundant. What is ‘investing’ if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation (which is neither illegal, immoral nor – in our view – financially fattening).”[1]

In their definition of investment, Benjamin Graham and David Dodd stated that “an investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”[2]

There are three distinct requirements in the Graham and Dodd definition as to what constitutes an investment operation:

1. it must be based on thorough analysis;
2. it must promise safety of principal; and
3. it must promise satisfactory return.

In addition to defining investment, Ben Graham also introduces the concept of MARGIN OF SAFETY. According to Graham and Dodd, an investor should only buy a stock at a price weigh below the estimated intrinsic value. Specifically, they state that the aim of the security analysts should be to select stocks for “which the market price falls far short of reflecting intrinsic value…”[3]

Since value investors purchase beaten down stocks, patience is a prerequisite for them to realize the full potential. James Montier mentioned that “Value strategies tends to outperform the market by around 7% in the first year. If you hold for another 12 months, an additional 6% is added to the return. In the third year an amazing 12% outperformance of the market is recorded, followed by another 8% in the fourth year”[4]

Patience is also required since value investors are cursed to be early in buying and also in selling.

Unfortunately, it appears as if patient long-term investors are an extinct species. The average holding period of a stock has fallen from eight years in the 1960s to around five days today. James Montier considered this as a “chronic case of attention deficit hyperactivity disorder”[5]

To the crowd, patience is madness; to the value investors, patience is wisdom.