Patience is a Virtue

It is also one of the only advantages an individual investor has over institutional investors.

You see, unlike professional money managers – whether they’re hedge funds or mutual funds – you don’t have to constantly be running in the relative performance derby and impressing your clients every minute of the day.  Not only can you take long term bets but you can wait and let them play out.

There are two posts worth checking out: (1) Your Last Remaining Edge on Wall Street by Morgan Housel and (2) Barry Ritholz’s post about that post.  So yeah, you will basically read three articles about the exact same thing but this is an important point so it’s worth repeating.

As Housel quotes Henry Blodget:

If you talk to a lot of investment managers, the practical reality is they’re thinking about the next week, possibly the next month or quarter. There isn’t a time horizon; it’s how are you doing now, relative to your competitors. You really only have ninety days to be right, and if you’re wrong within ninety days, your clients begin to fire you.

Housel goes on:

Holding stocks for less than a year amounts to little more than flipping a coin. You are almost as likely to lose as you are to win.

But the odds of success grow perfectly with time. If you hold for five, 10, 15 years or more, the odds of earning a positive return on stocks after inflation quickly approach 100%, historically.This chart shows the percentage of holding periods that generated positive returns:

The irony is that while Wall Street has more information than you, its short time horizon forces it to deal with more randomness than you have to. That’s your edge. And it’s why any bumpkin who buys an index fund and forgets about it will beat the vast majority of professional money managers over time.

Here’s another way to look at this. This chart shows the maximum and minimum annual returns someone would have earned between 1871 and 2012 based on different holding periods:

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