Patience does not come naturally to people. this is a Habit to develop. We often do things just to do. The same behavior is seen in people’s investment portfolios as well. If I may say, patience is even more rare in stock investing.
It’s no wonder why we like SIP Plans. It makes us feel good that we are investing regularly. What is the option?
Watch the market patiently and do nothing. Buy stock (equity) only if there is any market correction.
It doesn’t seem difficult. right? But we would still prefer to keep our investments on autopilot (SIP). Why? Because we don’t have the patience to watch the market. Also, having idle cash makes us panic.
Being a patient investor has its benefits in the long run. Patience does not mean inaction. it’s time to see and do other things.
In this article, we will learn about “other things”. These are the things we must do when we are not investing. This article will also provide a valid justification for not investing ‘always’. practicing it would be a precursor making money.
Patient Investor Activities Activities
You can see the flow chart. Here are four things that a patient investor does as part of a investment process. An outsider may feel that the investor is doing nothing. But in reality, he is repeatedly following the process in a loop.
Allow me to explain a four-stage investment strategy:
1. Identify companies with a wide gap
There are companies with high and sustainable profitability. They generate higher return on capital (ROCE) than them Cost of Capital (WACC). Such companies have placed themselves in a more favorable position than their competitors. They have a competitive advantage in their field/industry.
a company with a wide gap Its intrinsic value also improves over time. This means, if we buy a low-priced wide-mot stock today, over time, they get even lower. This is why, over time, companies with a widening gap can deliver unprecedented returns.
[Note: The current version of the Stock Analysis Worksheet gives an overall rating to its stocks based on six parameters: price valuation, growth potential, management quality, profitability, financial health, and economic moat.]
“Be patient, and when others are searching for quick stock tips from others, spend the time building your own list of broad-based stocks.“
2. Keep Depositing Cash
When other investors buy mutual funds using SIP, patient investors deposit cash using it Recurring Deposit (RD). The objective is to accumulate liquid cash and invest them when the opportunity arises.
Imagine yourself with lump sum cash available for investment during the end of March 2020 (covid-19 bar) As of today, your invested amount would have increased by more than 100%.
Let’s look at one such example from another perspective. Let’s say you have a watchlist of high-end companies. You Track those shares regularly. In March 2020 you found that the price of these stocks suddenly drops by 35-40% in a few days. Now, you are desperate to buy these shares, but you don’t have the cash. how would you feel? Desperate isn’t it?
During such times, cash deposited in a bank’s recurring deposit account can be a savior.
As much as it is important to stay invested, it is equally important to keep accumulating cash. This practice will never let us feel hungry when the opportunity arises. One of the easiest ways to do this is: pay yourself first.
“Be patient, and keep RD when others are boasting about their SIPs” 🙂
3. Awaiting Price Correction
Waiting for a price correction may seem easy, but it is far from it. To make waiting easier, create a watchlist in google finance will help. In the watch list, only include companies with a wide gap (Phase 1)
Add a column of ‘Present Price’ and ‘Estimated Future Price’ against each stock. For each company, set a margin of safety (MOS) – the discount on the future price. For example, bank stocks may have an MOS of -10%, and large-cap stocks may have an MOS of -15%. For other stocks, MOS above -20% would be better.
How to check whether the stock is trading at the required MOS or not? Use this formula:
Present MOS = (Present Value – Estimated Future Value) / (Estimated Future Value)
If you want to do this more professionally, replace “estimated future price” with stock. Estimated Intrinsic Value. Buying shares at a discount to their intrinsic value is an assured wealth-building strategy.
“Be patient, and wait for the market to improve”
4. Buy and Hold for Long Term
experts like Warren Buffett Advocating for stocks to be held for a very long time (as always). But there is a caveat. Not all stocks are suitable long term holding. Only stocks of companies with a wide gap are eligible for such preferential treatment.
Wide-mouth stocks have a distinct advantage. what is ours share price appreciation At a rate faster than the market average. Hence, it becomes easy for the investors to hold such shares for a long time. In fact, people are tempted to stick to such stocks.
Shares with narrow or no moat will not move in price consistently. People may have to wait a very long time to see a good price appreciation.
Holding good stocks for a long period has its advantages. I suggest you please read this article Effects of Share Splits and Bonus Shares. From this, one can get an idea of what can happen if you hold wide-mot stocks for a period of 15-20 years. Suggested Reading – What are compounding returns?
Also, it makes no sense to buy the stock at a discount first and then sell it soon. A portfolio should be given at least 3-5 years to show its potential.
“Be patient in buying wide-gap stocks with the intention of staying on them forever.”
If a small investor can follow these four simple rules, the chances of outperforming the market are greatly increased.
Out of all the steps mentioned above, I. give too much importance to cash accumulation (#2) and waiting for one price correction (#3). But to win the whole battle it is necessary to buy wide gap Stock at a fair price.
To practice patience in stock investing, we must follow the four-point strategy outlined above: identify, submit, wait, and hold.
So we can say that, while a trained investor may look like he is doing nothing, in the background, a lot is happening. At the very least, they are “grabbing” a pile of wide-ditch stocks and releasing them. power of compounding kick in.
“The big money is not in buying and selling, but in waiting”
— Charlie Munger
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of knews.uk and knews.uk does not assume any responsibility or liability for the same.