The stunning story of a patient investor who made good

Investment managers and professionals swear by two mantras. The one that gets the most buzz is to understand your risk tolerance. But it’s the other that I want to discuss today: have patience and conviction with your investments. This holds true whether you have hired an investment manager or investment advisor to manage your investments, or are a do-it-yourself investor.

I recently encountered a stunning example of the value of patience in investing. I was preparing a client’s tax return (note: the client has given me permission to discuss this example, without using their name). In preparing her return, I flagged that she may need a T1135 Foreign Income Verification form, which reports foreign holdings. My client had about 2500 shares of Apple stock, and I was unsure whether the shares has an adjusted cost base of more than C$100,000—the threshold to require that form.

The client said no, the original cost was far below the $100,000 threshold. It was just that she had held her Apple shares for around 14 years and not sold them. The client also provided me a summary of her stock purchase history. She had purchased 100 shares of Apple stock in 2008 for around C$16,000 and basically held onto them. She had only sold off a small portion once: in 2012, to help fund a house purchase.

The summary provided was startling. The 2,500 Apple shares that she owns had a fair market value of $375,000 (as of mid-April). Yet all she did was buy the original 100 shares 13 years ago for $16,000 and wait. Time and stock splits, and Apple’s overall strong performance, took care of the rest. What a textbook case of a patient investor (especially so given Apple’s stock price has been all over the place).

As someone who in shredding my tax returns a couple years ago realized how many flyers I had taken, how many disruptive stocks I had purchased looking for the big winner, I felt really ridiculous. I felt even worse when I realized that my first blog post on The Blunt Bean Counter in Sept 2010 was called Why Didn't You Buy Apple for $25?

In that post I discussed famed money manager Peter Lynch, who among many other suggestions noted that by just paying attention to what is going on around you and having some basic common awareness, both the novice and the sophisticated investor can find growth stocks in their day-to-day lives. I then commented in the 2010 post: “think of how much money any of us could have made paying attention to the iPod fad. Kids were suddenly walking around with white wires hanging out of their ears attached to these newfangled ‘Walkmans.’ In retrospect, how could we have missed this and not bought Apple?”

Why I did not buy Apple after writing that blog post is beyond me—and my clients’ timeline is fairly similar to that initial post.

Apple is just an example. You could have purchased most any Canadian bank in 2008 and had spectacular gains if you held the stock. Maybe not as large as Apple, but still substantial with significant less volatility.

So the moral of the story: Patience and conviction in your investing are especially important. That does not mean once you buy a stock you hold it for life; you still must review whether your original reasoning and thesis for purchasing the stock is still valid and whether the company is still growing. But good companies tend to stay good companies, and flipping from one to another or looking for the next disruptor is not necessarily the best strategy. Take it from me.

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Patience and Conviction in Investing

The expression “patience is a virtue”, has no truer application than investing. Patience typically necessitates conviction, which can be fleeting in the investment world. Most everyone who has ever invested in the stock market has regretted selling a stock too early because their conviction wavered. As Warren Buffett has stated “The stock market is designed to transfer money from the active to the patient.”

It has taken me several years to understand that part of the key to conviction, and staying focused on your long-term investing goals is realizing that your conviction, in many cases, will be tested. The market often does not reward your conviction with even the slightest acknowledgement by way of a small stock price increase. The stock market is cold hearted and does not care about your conviction or timelines, and may mock you and continually test your conviction by trying to convince you that have made the wrong decision.

That is, you may buy a stock at $12 and it trades for three to four years (or longer) between $10 and $12, and your conviction waivers. Then, suddenly, that stock finds market acceptance - be it through a significant transaction for the company, an analyst starting coverage, or just that sector becoming the flavour of the year with no underlying change to the company. Waiting out the stock market to have your convictions confirmed is often the hardest aspect of investing, as timing and conviction don’t often seem to converge.

An interesting sidebar to investment conviction, at least in my case, is that it has revealed a personality flaw. For someone who is typically not jealous or envious of others and open to discuss stocks I own, I have noted I have some resentment towards people when I know they have purchased a stock and received the same absolute dollar gain in two months that took me five years to achieve. It is not the monetary gain that causes this resentment, but the fact they did not have to suffer in the trenches with the same doubts and stress and persevere like I did - especially where the stock has been volatile, or had downward pressure. I know this is very small of me and I should just be satisfied my conviction proved correct, but I know others that feel the same way. I wonder if any of my readers have the same feelings, or is the fact your conviction proved correct satisfaction enough?

I return to Mr. Buffett to conclude, “With each investment you make you should have the courage and conviction to place at least 10% of your net worth in that stock.”

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.