Patient Capital - A Weakness or Superpower?
The word patience derives its roots from the Latin word Patientia which means 'to suffer' .
So when one invests in any equity of a particular business , does it entail that the investor be patient with the results? Or take flight at the first glimpse of danger?
Businesses are not linear growth engines, they have their own cycle of boom and gloom before their products finally reach the right customer who is willing to pay the right price for them. In addition to competitive pressures, businesses are subject to multitude of risks - be it regulatory, economic, pandemics etc.
In the face of all these uncertainties and chaos, does the retail investor really stand a chance versus the might of sophisticated institutional investors?
The stock market is a device for transferring money from the impatient to the patient
Warren Buffett
In a world of high speed trading where one can get the price of the stock to buy/sell within the breadth of milliseconds, we surely have come a long way of discovering the price of the last transaction( while mechanical ticker tapes have been around since 1860's , the real time electronic ticker tape was only introduced in 1996. Before that, brokers and their messengers ("pad shovers- who used to note down the quotations on a pad") used to convey the transaction information to prospective clients.
This constant bombardment of the stock prices down to the millisecond level makes the investor equivalent to the person who knows the price of everything but value of nothing.
Fundamentally, the value of any business should be equivalent to the present value of all the future cash flows generated from the business - considering that even the best experts have difficulty in predicting the future , there is bound to be disruptions in how the actual events pan out.
Warren Buffett, the legend of value investing, beautifully illustrates how one should view investments below:
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out. I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
The modern day stock market along with electronic media has led to almost zero information arbitrage between professional and amateur investors. This information overload and exposure to market noise has led to investors becoming more short term oriented ( The average holding period for a stock in NYSE has fallen to approximately 9 months from a high of nearly 8 years during 1940-1960's)
Where an amateur can seek to have an edge is to have a long term horizon on the businesses which he/she understands and not be constrained by various limitations imposed on institutional investors ( fund size, sector/investment restrictions, public disclosures , scrutiny etc).
Tom Russo of Gardner Russo and Gardner has a preference for businesses which have the Capacity to Suffer - companies which are fine with looking bad in short term in order to reap the benefits over the long term. He has invested in multitude of such companies which have become long term success stories for their shareholders like Nestle, Heineken etc.
When we, as an investor, come across such companies which we understand and wish to partner with in the long term , then it is an imperative for us to build the capacity to endure suffering while the business goes through its natural cycles and invests for growth at the cost of short term profits.
So my dear readers, do you have the patience and capacity to endure suffering on your path to wealth creation?