Profit From Patience

Published in Investing on 27 January 2012

Patience is one of the key attributes of the most successful investors.

"The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient" -- Warren Buffett

Consider the following scenarios:

1) You invest in a company you believe the market has undervalued. You sit back and wait for the shares to re-rate. The shares go nowhere, or even fall. After a while, you fret about whether the market knows something you don't, or perhaps you simply grow bored. You sell the shares. No sooner have you done so, the share price starts rising.

2) You find a fantastic company you'd just love to invest in, but it's on a higher valuation than you'd usually find acceptable. You persuade yourself to make an exception, and buy the shares. No sooner have you done so than the company issues a positive trading update -- but not as positive as the market was expecting, and the share price slumps.

Both of these experiences are common, particularly for new investors. I've certainly fallen foul of them more than once! And I bet you have, too.

Vice and virtue

The more we can learn to suppress the vice of impatience and inculcate the virtue of patience, the more successful investors we'll become.

For the past 18 months I've been trying to educate my teenage son, Sim, about investing, while he builds a portfolio of family firms. Recent events have transpired to teach him some important lessons about the value of patience, as well as providing him with the first-time excitement of a takeover offer for a company in which he owns shares.

Even before we made our first investment, there were some companies on our watch list that Sim took an immediate shine to -- companies whose products he knew and liked. Some of these firms, through their differing fortunes, have proved to be particularly good teachers on the topic of patience.

The patience not to sell

Robert Wiseman Dairies (LSE: RWD) was at the top of Sim's wish list after he discovered this firm supplied the gallons of milk he drinks each week. Soon into our project, Wiseman's shares fell 30% following a profit warning.

You can read a full account of our analysis of Wiseman but, in short, we concluded that the shares were cheap. And so we bought them (at 333p). A year later, they moved below £3 and I suggested to Sim he might think about buying more. To be fair to him, he showed more patience than I did when I first began investing and was happy to double his holding.

Patience was rewarded, in the shape of a recent bid for Wiseman from German dairy group Müller at 390p per share. A stroke of good fortune? After the initial excitement of receiving his first takeover offer, Sim didn't think so: "They knew Wiseman was cheap, like us. They're getting a bargain."

The patience not to buy

I believe Sim would have had the patience to stick with Wiseman if Müller had never made a bid. He's found it harder, though, to remain patient in the other case: not buying companies he likes when their valuations are too high.

AG Barr (LSE: BAG), the maker of Irn-Bru and other soft drinks, is a firm Sim would dearly love to have a stake in. Unfortunately, much to his annoyance, it's looked fully valued, or overvalued, whenever we've put it under the microscope. That hasn't stopped the share price advancing, and it was up another 3% on the day yesterday after releasing a positive trading update.

However, I've heard less disgruntlement from Sim about not buying Barr, since he's seen what's happened to another highly rated company he's had his eye on: PZ Cussons (LSE: PZC).

The maker of Imperial Leather and a host of other household brands issued a profits-will-be-below-expectations trading update in December, and the share price plunged over 10%. After announcing its interim results earlier this week, the shares are now trading at the lowest they've been since we started building the Family Firms Portfolio.

My Foolish colleague Alan Oscroft sees Cussons as still too expensive, but I'm sure it's a company Sim will want us to take another look at ourselves in the coming weeks.

Bottom line

We've certainly made some mistakes in the course of building the Family Firms Portfolio, but I think Sim's done well in suppressing the vice of impatience and inculcating the virtue of patience.

Patience, I believe, has been a major contributor to the performance of the portfolio to date. The unit value has increased 60% compared to a 22% gain returned by the HSBC FTSE All-Share Index tracker.

Learn to be patient and the rewards will come. That's something I'll be trying harder to remember myself!

> Here's your free Essential Investor Kit. Over the next few weeks, you'll get share ideas, a sector report and much, much more. Don't miss out!

More from G A Chester:

> The Motley Fool and G A Chester & Son own shares in Robert Wiseman Dairies.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

zapokee 27 Jan 2012 , 11:52am

What a brilliant way to bring up a kid! Well done.

vinchainsaw 27 Jan 2012 , 12:52pm

I love these articles. Possibly my favourite on the Fool. Thanks for sharing!

Hannibalis 27 Jan 2012 , 4:55pm

I agree about patience - it is probably the most important behaviour to cultivate.

MunroMan 28 Jan 2012 , 9:10am

As Barclays,Dimson and Siegel all prove equity returns come from dividends, reinvested dividends and growth in dividends. They do not come from capital growth that is why patience is. Important.

Demonstrating outperformance against the Market just demonstrates that you have taken more risk. That might give you alpha but has it added value after adjusting for the additional risk?

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