Patience is the key to successful investing. I have written about Increasing Time Horizons Is The Only Way For Individual Investors To Outperform. But with the goings on this year, this point needs to be reiterated. As Buffett has said “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Investing is like gardening, it takes time to build something beautiful. If we were as impatient about gardening as we are about investing, we would never have any flowers or trees.
Take Tom who plants some seeds in his back yard. After a day, he checks back. Surprise, surprise, nothing! He digs them up and replants them on a different spot. After another day, still nothing. And after a week he is dismayed that he has no oak trees in his backyard. He believes oak tree planting is a scam!
This may sound shocking but it is exactly how we behave when it come to investing. If a stocks doesn’t move for a day, a week or gasp even a month, we grow tired and sell out the position. We then go chase the next hot fad. Investing this way is becoming extremely common. And in time people who behave this way will pay via the sub standard returns they receive.
Investing should be about patience. It should be about understanding the underlying business behind the stock. Just like a business won’t grow its bottom line 10% day after day, you should not expect a stock price to shoot up 10% day after day.
They are periods when a stock will go nowhere – and that is ok. For as long as the underlying business is operating soundly and compounding value over time, you should not overly focus on the stock price as sure as night follows day, stock prices will eventually catch up to the underlying business performance.
As Buffett put it in an annual letter ‘ Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.’
This is why I am surprised by the behaviour of the current crop of investor. No one seems to be practicing the intelligent behaviour of inactivity, or as Terry Smith of Fundsmith puts it, doing nothing. Every wants to chase the next hot thing. Whether it be hydrogen stocks, SAAS companies, cryptos, meme stocks. It is no surprise the average holding period for a stock is under 5 months.
Looking closer to home in the UK markets, the need for investors ‘to do something’ is running high. The current trend is to tilt portfolios towards cyclical companies. And many are doing this by selling quality.
Many high quality blue chip companies listed on the London markets have gone nowhere over the past couple of years. This has lead investors to flee from these stocks in search of ‘greener pastures’. This is a head scratcher. I need to ask myself ‘Why would any one be selling shares of this proven value creating business when evidentially there is still much more to come from this business?’. The only answer I could come up with was the need for people ‘to do something’. The need to trade.
Not that I am complaining. Irrationality allows the rational behaviour to scoop bargains. And we have seen high quality UK companies trading at attractive valuations over the past month. The favourable ratings on many stocks allowed me to purchase the following shares during my March stock purchase programme:
- GSK – Bought 12 shares at £12.30 each
- HL – Bought 11 shares at £15.17 each
- RB – Bought 3 shares at £60.22 each
- LSEG – Bought 4 shares at £76.02 each
- ULVR – I will do a separate post as I have been buying shares in this blue chip company hand over fist over the past couple of month. The post should be published next week.
From the above list, only the London Stock Exchange Group (LSEG) is a new edition to my portfolio.
Looking at LSEG, it has fallen close to 20% from the beginning of the year to the date I bought my shares. There are a number of reasons for this. The most pertinent one is the market believes LSEG has overpaid in its recent deal to acquire data specialist Refinitiv and it will have a tough time integrating this company. It also doesn’t help that the previous owners of Refinitiv, Thomson Reuters, Corp and members of Refinitiv’s management plan to indirectly sell about 10.5 million voting shares in London Stock Exchange Group which they received as part of the deal! They are other concerns such as London’s position post Brexit as a Financial hub which could affect trading and clearing flows as well as the recent results which were not as expected for a company trading at such a high valuation.
At current prices, LSEG trades at a mid to high 20’s forward earnings multiple, depending on the forecast you view. Is this a fair rating for LSEG? That is the question. I guess it all boils down Refinitiv’s integration and future performance. For what its worth, I believe LSEG ‘original’ or core business is as strong as ever and it would be very hard for other provider to capture LSEGs clearing market share. Have a listen to the MMP Podacst with former London Stock Exchange CEO Xavier Rolet to understand why. Only time will tell how this will play out. In the meantime, for as long as prices stay around these levels, I will continue adding via my monthly stock purchase programme.
As for the remainder of purchases this month, they are adds to my current holding. GSK, HL, RB and ULVR are the steady eddies of the investment world. They bring a sense of calm and stability to my portfolio. It can be a temptation to skip over them when looking through list of potential new holdings for your portfolio. They never seem to do anything, causing impatient investors to sell their stock after a few years of seemingly non-movement. These firms are the tortoises of the finance world. While everyone else is paying attention to the hare, they just keep putting one foot in front of the other, churning out fresh cash for their owners as the majority of spectators ignore them. They are consistent. They are overlooked. They are usually mispriced. And they provide patient investors with wonderful returns over time.