If the most important part of my trading strategy is capital risk management, patience is a close second. Patience is something that I personally struggle with in almost every aspect of my life besides the markets, which is weird to some degree, but a benefit to those who would one day choose to invest with me. I didn’t use to be that way of course, it took a lot of lessons learned and dollars lost before I understood the true benefits of patience in the markets. Throughout this piece I will highlight three reasons as to why patience is key when dealing in financial markets, and the pitfalls that traders and investors can stumble into if they do not adhere to patience.
Reason 1: Patience Saves Money
Patience in the markets saves the investor countless dollars, most of those dollars saved aren’t even from the potential loss of a rushed investment. The dollars I am talking about are commission dollars forked out with each trade. If one rushes to make trades, not waiting for ideal classical chart setups, the trader ends up in a precarious situation of paying a lot more in commissions at the end of the month than a patient trader.
When one enters a trade (unless using a free brokerage like Robinhood, which I advise against if you are a serious trader), they have to pay to buy (or sell) the stock, and then again once they exit their position. Thus, increased (or rushed) trades leads to increased expenses at the Fund, which in turn would lead to lower net returns for the Fund’s shareholders. It is for this reason that I make it poignant to never rush a trade, and to always be patient. The less commission costs I incur for the Fund, the greater the net returns will be for its shareholders.
Holding all else constant, I want to talk about the realized dollar losses of rushed trades. As an investor, it is my responsibility to enter a trade when and only when the trade has met my criteria for a proper trade. This will look different for every speculator in the markets, but my criteria for a proper trade is well documented within the interwebs of this investment blog. Every trade I make outside of those contingencies is a risky trade, a careless trade, and a trade most likely done on the basis of rushing myself. For this reason I keep a documented journal of all of my trades when I enter a trade, as well as when I exit a trade. I do this so I can judge how I was feeling, why I entered the trade, and what I expected from this trade. In doing so, I create transparency with myself and for anyone who wants to know the motives of my trades I will provide them at once. If you receive my newsletter emails, you already see a taste of this when I enter trades. If you are not on the newsletter, please comment to this post or email me.
2. Patience Saves Psyche
More than dollar capital saved, patience in the financial markets saves mental capital to an exponentially higher degree. I am all for saving and increasing my mental capital. I do this a) because I started this speculating game at a relatively young age of 13, and b) It is the only way I know to keep me level headed when looking at financial markets. Burnout is something that every financial market speculator must come to terms with. Burnout is the Darwinian model that separates the veterans from the newbies that exit the game as quickly as they entered. My goal is to be one of the greatest investors in North America (some of you might be thinking, ‘Why not just say the world?’, and to that I don’t have a credible response). In order to do this, I recognize the need to STAY IN THE GAME. Practicing patience in the financial markets saves my mental capital by allowing me to be on the sidelines if I don’t find anything really worth investing. The problem with a lot of institutional investors, and even novice traders is they think they have to always be in the market, to always be trading. On the institutional side of the coin, investors must show their clients that they are in the markets, even going so far as buying big names just so that their clients recognize names when they open their quarterly letters.
As an investor, I will never do this. I don’t like rules, except for the rules that I make for myself. It sounds very weird saying that, but it is true. I don’t like having investment rules placed on me that I can’t control. I make investment decisions based on what I think is undervalued and a great technical chart set-up, not whether or not Sally or Joe will recognize the names of the companies in the Portfolio. I don’t cater to any particular clients interests except for the interest of maximizing return and minimizing risk.
By being on the sidelines, I don’t have to add that extra stress of feeling like I need to be in the markets 24/7. One of my favorite investors to read and listen to is Seth Klarman. Klarman is one of the greatest deep value investors of all time, and his book on the Margin of Safety can be bought on eBay for $1,500. Seriously. What separates Klarman from the rest of the investors pack? Simply put, Klarman isn’t afraid to hold large cash balances, sometimes in excess of 50% of the total portfolio. That takes discipline and patience.
3. Patience Creates Flexibility
Piggybacking off of the second point, financial flexibility within the Fund is crucial and can only be done if the Investor has patience. If an investor doesn’t have patience, they will likely suffer from having their portfolio overexposed to various markets, very little cash balances, and rushed trades placed at inopportune technical targets. As a patient investor, holding appropriate cash balances when necessary, when an opportunity knocks you have the ability to jump on it fast. Plus, with the increased cash holdings the patient investor doesn’t necessarily need to liquidate any current positions for a foreseen better position.
To conclude, patience is a close second to risk and capital management when it comes to what makes an investor a great investor. Without patience, an investor can have a terrific strategy, a terrific ability to read technical charts, but will have nothing to show for it due to rushed trades and taking profits too quickly. As your fund manager, disciplined patience is what I will always strive for.