Time and Patience
Even though there is ample evidence that long-term thinking, patiently applied, is the best course for investing success, it appears that nothing much has changed. Even the 2008-2009 financial crisis and bear market haven't changed our behavior. These days, virtually all market activity is short-term. In 1960, the annualized value-weighted NYSE/AMEX turnover was less than 10 percent. Today, that ratio is greater than 300 percent---a 30- fold increase over the past 50 years. It is hard to believe that this dramatic increase in activity has not had a transformative effect on both the market and the participants.
Theoretically, an increase in market participation coupled with higher trading volumes is thought to lead to better price discovery, which in turn leads to a narrowing of the price-value gap with a corresponding reduction in market noise and volatility. But in reality, we have learned that if the majority of the market participants are speculators, not investors, then we are likely to see the exact opposite: The increase in trading activity will work to widen the price-value gap, increase the noise in the system, and lead to spikes in volatility. In this world, an investor who is hostage to short-term performance pressures will feel nothing but discontent.
It doesn't have to be that way. The success of Warren Buffett is very much about his desire to play the game differently. And we are all invited to join him in that game. The only requirement for successful play is the willingness to adopt a different set of rules. Of these, none is more important than the value of patience.
Time and patience, two sides of the same coin---that is the essence of Buffett. His success lies in the patient attitude he quietly maintains toward both Berkshire's wholly owned businesses and the common stocks held in the portfolio. In this high-paced world of constant activity, Buffett purposefully operates at a slower speed. A detached observer might think this sloth like attitude means forgoing easy profits, but those who have come to appreciate the process realize that Buffett and Berkshire are accumulating a mountain of wealth. The speculator has no patience. Buffett, the investor, lives for it. As he reminds us, "The best thing about time is its length."
And so we come back full circle, to the critical issue of emotion and its counterpoint, rationally Intelligence alone is not enough to ensure investment success. The size of the investor's brain is less important than the ability to detach the brain from the emotions. "Rationality is essential when others are making decisions based on short-term greed or fear," says Buffett. "That is when the money is made."
Buffett recognizes that he is neither richer nor poorer because of the market's short-term fluctuations in price, since his holding period is longer-term. Whereas most individuals cannot endure the discomfort associated with declining stock prices, Buffett is not unnerved, because he believes that he can do a better job than the market in valuing a company. Buffett figures that if you can't do a better job as well you have been in the game for a while and don't know who the play is, you're the patsy.
Absent rationality, investors easily default to System 1 thinking, which is adequate for simple and predictable tasks but not for the complexity that is the stock market. Absent rationality, investors become enslaved to the basic emotions of fear and greed. Absent rationality, investors are desired to become the patsy in the game called investing.
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