We often talk about the characteristics of successful investors.
Certainly, they all have a game plan, a strategy, or a methodology they follow. We know that successful investors have access to great information. Not only do they have access to information, but they also have the ability and expertise to use that information to their benefit.
The third component, which I believe is frequently overlooked, is the concept of patience. Patience (or “the long view” as we call it) is not only one of the core values at our firm, but a core tenet of successful investors.
Don’t Let Market Volatility Lead you to make poor Investment Decisions
As human beings, when do we get impatient? When do we get bored? In our world of finance, I wonder if the ups and downs of the markets are where we get impatient. As I gave this question more thought, it occurred to me that impatience comes not necessarily when there is a sudden downward movement in the market. No, it seems to happen more when we see a lot of sideways action and it looks as though nothing significant is happening. No one can predict what's going to happen in the next second, minute, day, week, month, or year. But say an extended period time goes by where markets are up one day, down one day, up two days, down one day, and before you know it you’ve had six or nine months, maybe a year and a half of this kind of choppiness and back and forth. Investors get impatient.
I get impatient, too.
I can relate to this feeling in many aspects of my life. I see it in my training plan when I go through periods of not making any significant gains. It feels like a grind. It is a grind. It’s two steps forward, one step back, three steps forward.
This reminds me of my days as a competitive athlete. Anyone who’s an athlete or who has competed at anything knows about a phenomenon that we're all susceptible to. I like to call it, “learning how to lose.” You know, once you're in a losing streak, you lose a few games in a row, it can be easy to fall victim to the expectation that you are going to lose further. Say you play well for the first 75% of the game, but in the last quarter, it feels like something always happens that gets in the way of winning. It's not an intention to not have the outcome that you want (meaning, you want to win!), but it becomes part of the mentality that you’re going to lose.
When it comes to the state of the economy, we see the same attitude. It's defeatist, it's limited in perspective, it's immaterial, it's irrelevant, and it's no different from a sports team that steps onto the field hoping to win, never quite believing that it could happen. I see a similar thing in the investment world, where the impatience creeps up, like oh geez, it just doesn't feel like things are happening. Nothing happens, and you finally get to a point where you feel like you need to do something different. You need to throw that proverbial Hail Mary make a significant change to your portfolio.
Resist The Urge to React to Market Volatility
I was reading a great book recently that likened this tendency to “do something” to a parent who can’t stand to see their child have a fever. What does the parent do? They want to break the fever by giving the child some medication. (I am not suggesting that you not tend to a sick child.) What I am suggesting is that as humans, when we feel like we can’t stand a situation, we feel a need to do something to change it.
This kind of thinking is vastly unproductive in finance (and other areas of life).
I talked about this in a piece where I was thinking about Super Bowl LI (51) where the Patriots faced the Falcons back in 2017. The Pats were down 25 points late in the third quarter. Anybody that watched that game may have easily concluded that it was down to whether the Patriots could pull off a miracle. But everyone who watched that game remembers that wasn’t necessarily the case. It didn’t take a miracle. There were no trick plays, there were no Hail Mary passes. Little by little the Pats chipped away and continued to execute over the rest of the game and eventually put themselves in a position to win, which they eventually did in overtime. They very well could have gotten really impatient, right? Three-quarters of the game was nearly gone; they could have given up.
As human beings, we are susceptible to throwing the game plan out the window and doing something vastly different. But that's not what the Patriots did. That's not how football teams work. You work all week, or in the context of a Super Bowl, you have nearly two weeks to prepare for that game. You put in a game plan and you may not run all those plays, but you run the plays that you've been practicing over the past few weeks. You don't come in and face the situation the Pats did, and suddenly do something vastly different just because things aren’t going your way. Those of us that stayed and watched the game and didn't shut the TV off saw them stage a spectacular comeback.
Trying to Predict Stock Market Trends Is An Exercise in Futility
Over the last three or four years in the market, we're talking from the onset of the pandemic to the present day, how much patience have we needed to exercise? We know that every single one of these bear markets that we've experienced over the last couple of years, they've all recovered. They’ve all looked terrible, felt terrible while we've been inside them and they've all recovered.
Yet there are times along the way when as an investor you feel like your patience runs out. In our line of work, we frequently hear, “oh my brother-in-law says we're in for a terrible 2023,” or “my super successful friend who works for ABC corporation, he's an executive and you know, he says, you know, you're crazy to be in the markets right now.” All these statements are a sign of impatience.
By the way, these are the same folks that were touting crypto a few years ago. I can't tell you anything about the future, just like those folks couldn’t, either. There are no facts about the future. We can examine, as we all know and do, all the bear markets throughout history, and against the backdrop of all the negative things that have happened over time, the markets have moved forward and upward over long periods of time.
At Beck Bode, we have a training program where we teach our team members our investment strategies. We take our team through an exercise where we look at the last 20 or so years of the markets. For each year, the assignment is to examine what was going on in the world during that year. What might be a reason that somebody may have been concerned about investing? What was the contagion, so to speak? Regardless of what was going on — while the issues were different in name and circumstance — eventually (if you waited long enough) the market recovery came.
When I got into the business in 2004, the Dow Jones was trading right around 9,000. My mentor David Mallach said to me that I would see the Dow go to 15,000 and then to 20,000, and then maybe if I blinked it would be at 30,000. He reminded me that at most of the points along the way, I’d hear comments like, “…the market is at an all-time high, it can't possibly go any higher, it's so overvalued.” But then it did hit the next level. And then again.
Of course, along the way, we experienced a ton of volatility. The corrections, some of those drops, shook some people to the core. Then a little bit of time went by, and the markets moved higher. And that's just the way of the world. Right now, at the time of this writing, the Dow is around 32,000. All the drama that we've seen in the past year, the aggressive interest rate hikes by the Fed that are required to keep inflation under control have had some impact. At one point last year, the S&P was down something like 27%. It feels like this situation has been going on forever.
Ultimately, if we look at any circumstance in history, is this time going to be any different than any other we have faced? Inside ourselves, it sure feels like this time is crawling along, it feels like it's never-ending. When we go through a period of choppiness and things just don't seem to be happening the way we want them to, or the way we think they should, no matter if it's a week or 52 weeks, it feels like an eternity. We must tune out the noise, tune out all the disruptions, continue executing the long-term plan that we’ve put in place, and totally ignore the short-term market conditions that are grabbing our attention.
Are we in a recession? What does it mean for the portfolio? Is that really the question? Do any of these questions really matter given all that is unknown and unknowable? How can anyone make a rational recommendation about what is to come? The one thing I know with certainty is that fighting inflation is not only the most important thing that we need to do right now, but as I've discussed with many of our clients, it’s worth it. We will take the pain. We will take the short-term pain of interest rate hikes and all the uncertainty that they may bring, knowing that we must destroy the cancer that is inflation.
Patience and Long-Term Focus On Your Financial Goals Are Key To Success
We are planning-driven equity investors. Long-term focus is our strategy. Impatience is not. The success of each one of our clients comes from continuously acting on the plans we put in place. We must remind ourselves and our clients of this all the time — especially during periods when ‘not a lot’ is happening, especially when markets feel flat.
Success financially comes from continuously acting on a plan, and substandard returns or investment failure comes from reacting to current events. The most reliable way to capture the full premium that equities will offer in the years to come is to ride out these frequent yet temporary declines that we see. This is a principle that we stand for as a company.
I’m not necessarily sitting here and saying to investors that everything is always going to be okay. We know that's not the case. But staying engaged and staying patient is the key to winning. My role is to execute the financial plans funded by our portfolios through good times and bad — because patience is the name of the game.
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.