Patience is Your Secret Weapon
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Impatience (noun) - the tendency to be impatient; irritability or restlessness. What causes impatience? Impatience is triggered when we have a goal and realize it's going to cost us more than we thought to reach it.
Impatience is the single biggest obstacle to financial freedom. We are living in an age of instant gratification, same-day delivery, and super high-speed internet. We complain about being forced to wait for 40 minutes for takeoff on a transatlantic flight. We have lost sight of the fact that modern-day air technology allows us to travel from New York to London in 6 hours. In the old days, it took weeks by boat and there was always the chance that if you did not die of scurvy, you were attacked by pirates or crashed into icebergs.
I Googled “long term stock investing” and came up with 269 million results. I then Googled “stock trading” and came up with 4 billion results. Why is it that trading yields 1,400 percent more results than investing? This is no surprise because trading is sexier than investing. The objective is the extraction of short-term profits. Day trading or scalping has taken off over the past ten years. To answer this question, you need to answer the following: when it comes to money management, do you want sexy or do you want boring? Do you want Marilyn Monroe in the Seven Year Itch or Fred the accountant?
In a perfect world, you want your chef to be French, your sports car to be Italian, the driver in the lane next to be non-Italian, your watch to be Swiss and your policeman to be British. What about money management? There is a great quote from Paul Samuelson. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas. This is not to say that you should invest in the money market, but I would suggest that there is greater merit in investing in long term, stable, and boring companies that are growing predictably than looking for short term wild swings.
Mark Twain had the following to say about speculation: “OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. There are two times in a man's life when he should not speculate: when he can't afford it and when he can.”
Now for the facts. Two of the greatest long-term investors are Warren Buffett and the Swiss-Brazilian, Jorge Paulo Lemann. Both men made their fortunes making long term bets on companies like Coca Cola, American Express, Kraft Heinz, Bank of America, and Anheuser Busch. As at the beginning of November 2019, according to the Bloomberg billionaire’s index, Buffett was the 4th wealthiest man in the world with a net worth of $86 billion and Lemann was 43rd with a net worth of $22.5 billion.
We now move across to the hedge fund billionaires. Hedge funds are unconstrained funds that tend to have shorter time frames and therefore are more often associated with trading.
According to Bloomberg, the richest hedge fund manager as of November 2019 was James Simons, the founder of Renaissance Technologies that has $61 billion in assets under management. The fund has delivered annual returns of 40 percent since 1988 and has paid him more than $9.5 billion in cash distributions since 2006. Second on the list is Ray Dali, the founder, and co-chief investment officer of Bridgewater Associates, a hedge fund firm that manages $160 billion in assets. Simons was worth $20.7 billion and Dalio $16.6 billion and were ranked a lowly 49th and 75th respectively.
So, let's do some averaging. The average wealth of the top two investors is $54 billion while the average wealth of the top two traders is $18.6 billion. The universe is clearly saying to us that long term investing is more profitable. This is a random exercise but let me tell you one thing for sure – it is easier to replicate the strategies of Buffett and Lemann than the strategies of Simons and Dalio.
Financial freedom is mostly achieved by making small incremental changes. If you set the goal of doubling your income in six months, I think there is a high probability that you will fail – unless you become a drug dealer or a YouTube influencer. Your objective should be to make small, incremental, and consistent changes to your spending patterns. Dramatic and radical changes seldom work over a long time when it comes to financing. It is the same a crash diets – you may succeed it dropping a bunch of pounds in the first few weeks, but after a couple of months, you have added those pounds and then some. You should compare your finances today with how they were yesterday and focus on small incremental changes. Set numerous small achievable goals. A fraction of a percent changed every day, compounded over many months and years will yield outstanding results. Compounding is the key to financial freedom.
If you are still not convinced, let me close off with a quote from the great Warren Buffett: “The stock market is a device for transferring money from the impatient to the patient."