By John Lunt, Lunt Capital
A recent headline caught my eye – “Hurry Up! Modern Patience Thresholds Lower Than Ever Before, Technology to Blame.” The article’s recap of a survey of 2,000 British adults included the following gems: “Respondents reported becoming frustrated after just 16 seconds of waiting for a web page to load, and after 25 seconds of waiting for a traffic light to change…Waiting in line seemed to especially annoy respondents, with 45% admitting they had lost their temper after waiting an “excessive” amount of time. But, what exactly is excessive? Respondents said just 30 seconds of waiting in a line would be enough to try their patience, and half said they are likely to switch to a different line if the one they are in isn’t moving fast enough.”
While I can’t vouch for the methods or accuracy of the survey, life experience suggests the results are generally correct. Comedian Will Ferrell perfectly captured today’s mindset when he said, “Before you marry a person, you should first make them use a computer with slow internet to see who they really are.” What are the investment implications of an “on demand, instant access, get it now, no patience” society?
Behavioral mistakes are often an investor’s worst enemy, as emotional responses to news, to uncertainty, and even to normal market movements may lead to suboptimal decisions. Going forward, will we see a premium earned for investors exhibiting patience? While not an investment factor in a traditional sense, we believe there is a “patience factor.” Patient investors may capture long-term alpha from increasingly impatient investors with short time horizons expecting instant gratification from their investment portfolios.
This is not a plug for or against “buy and hold” investing or for or against active management. Lunt Capital manages both strategic and tactical ETF portfolios. Instead, it is a suggestion to understand the strategy and characteristics that underpin an asset allocation, a manager, an index, a strategy, or any portfolio position, and then have the patience to allow each component to do what they are designed to do! It is important to note patience in faulty strategies or incorrect assumptions will likely lead to poor outcomes. Patience in reasonable assumptions and thoughtful, disciplined allocations and strategies are likely to improve the probabilities of long-term success.
For example, each year there will be some individual asset classes that outperform a diversified allocation of multiple asset classes. Impatient investors might conclude that diversification doesn’t work and abandon a multi-asset allocation that may appropriately meet their long-term objectives. What are other common examples of impatient investing? A long-term, strategic growth investor who sells his or her equity ETF simply because it declined for some period of time or a long-term, tactical investor who sells his or her risk-managed strategy because it didn’t fully keep up on the upside with the S&P 500 ETF for a period of time.
Back in May of 2016, I wrote an article titled “Asking and Answering the Right Questions for Your ETF Portfolio.” This article highlights questions to be asked around portfolio design and asset allocation. Here is an excerpt from the article: “Investors and advisors need to answer the most important question: “How much negative variation from a benchmark is acceptable and for how long will negative variation from a benchmark be tolerated?” Positive variation from a benchmark is desirable and welcome. Long-term outperformance over a benchmark typically requires a willingness to look very different from a benchmark. Periods of outperformance may be followed by periods of underperformance. Patience to look different from a benchmark is a critical design question—less tolerance for variation from a benchmark will result in looking more like the benchmark. An investor expecting outperformance must accept a strategy design that leads to behavior very different (up or down) from the benchmark. One of the reasons that many advisors and their clients do not outperform their benchmarks is that they do not allow carefully designed strategies to do exactly what they are designed to do—which is to look different!”
Julius Caesar must have been thinking about investing when he said, “It is easier to find men who will volunteer to die, than to find those who are willing to endure pain with patience.” Those willing to patiently endure some investment pain, i.e., occasional absolute declines for their investment beta or seasons of high downside tracking error for their sound tactical strategies, are often rewarded with long-term investment gains.
The investment patience we are referring to does not reflect indecision. In fact, many great investors are decisively patient and then only act as circumstances or strategies warrant. Edwin Lefevre’s 1923 classic Reminiscences of a Stock Operator extols the virtue of patience for active and tactical investors: “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! … Men who can both be right and sit tight are uncommon. The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street…lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.”
Few would argue with the results Warren Buffett has produced with his patient, long-term investing. However, his performance includes months, quarters, and years of significant underperformance versus the S&P 500. He once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” That “tree” providing shade and fruit is the reward for long-term, patient investing. As we labor to nurture, protect, and grow an investment tree, it is worth remembering the words of Ralph Waldo Emerson, “Adopt the pace of nature: her secret is patience.”
Whether you embrace passive or active investing (or both!), a patient outlook combined with a clear understanding of the characteristics of your chosen approach are important ingredients for long-term investment success. So hurry up and learn patience! The “Patience Factor” on your investment tree is ripe for the picking!