The Most Underrated Investment Skill

John Cousins

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Through study and experience, successful investors develop valuable skills. These include researching a stock and applying critical thinking to opportunities.

In the great Herman Hesse novel, there are three things Siddhartha can do. Siddhartha can think, wait, and fast.

Thinking is crucial in investing. Reading and understanding financial statements, markets, and valuation are learnable skills.

One also needs to invest money that is not going to be required to pay bills. We need to be able to weather fasting periods.

Cultivating the ability to wait is challenging.

Patience is not only the capacity to wait, but also to keep the right attitude while waiting. It's discipline.

What three things can Siddhartha do? Siddhartha can think, wait, and fast. Siddhartha would make a good investor.

" Patience is bitter, but its fruit is sweet." - Aristotle.

Warren Buffett is one of the greatest investors of all time. He is a living legend.

One widely quoted pearl of wisdom from the legendary investor is:

"Rule №1: Never lose money. Rule №2: Don't forget rule №1".

I take that to mean not necessarily how to be right, but how to be less wrong when investing. One meaningful way to interpret that is don't panic and sell a position in a market downturn.

"In the end, how your investments behave is much less important than how you behave."

— Benjamin Graham

That takes patience. The patience to hold on, weather the storm, and get rich slow.

"The chief cause of failure and unhappiness is trading what you want most for what you want right now."

- Zig Ziglar

Success in life comes down to variations of the marshmallow test of delayed gratification.

"Waiting helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that." — Charlie Munger

Siddhartha can think, wait, and fast. Siddhartha would make a good investor.

Discipline to wait in trading and investing has become more challenging in the past year because now there are zero trading commissions. Paying a commission used to at least provided some inertia. That friction would encourage us to take a step back and redouble our analysis effort before pulling the trigger. Now it's more like: Ready, Fire, Aim.

Before making a move, take some time to review the situation and look at the company through its 10K.

There are four areas to keep in mind when you are analyzing business performance and its leadership:

  • Strategy: Do they articulate clear and compelling goals?
  • Structure: are they organized to fulfill those goals?
  • People: do they have the right people and capabilities to meet their goals?
  • Process: do they have the operations and supply chains needed to meet their target goals?

Read a company's last few 10Ks with these criteria in mind. And be mindful of how it's written. Do they keep it simple and straightforward?

Much of effective communication and leadership hinges on clarity.

Warren Buffett has shared his investment secrets. His investing success is based on three simple rules:

  • 1. Invest based on the intrinsic value of a company.
  • 2. Be prepared to hold your position in a company forever.
  • 3. Never invest in a company with a business you don't understand.

These investment principles are simple. Everyone can follow these rules.

They are simple rules but not easy to follow.

"All know the way; few walk it." - Bodhidharma

Jeff Bezos asked Warren Buffett about this point:

"Warren, your investment thesis is so simple and yet so brilliant. Why doesn't everyone just copy you?"

Warren Buffett replied:

"Because nobody wants to get rich slow."

The way to wealth is the patience to get rich slow.

Getting rich slow requires patience.

Patience involves staying calm in situations where you lack control.

Being patient is hard. It means overcoming our instincts of fight or flight. We have evolved to take action in the face of perceived danger.

In many situations, action is the answer. Harry Truman said, "Imperfect action beats perfect inaction."

Having a bias toward action can help entrepreneurs and startups.

But in investing, perfect inaction may be a better strategy in many situations.

I like to go long stocks and short options. This long/short approach has been a very productive strategy for me as I can juice returns and create income to reinvest. But I can't count the times I have quickly unwound an investment position only to wish a day or two later that I had waited.

With investing, action can translate into selling something. Selling feels like you're shielding your investment portfolio from further harm. But selling at the wrong time is one of the biggest and most common investment mistakes.

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"In the end, how your investments behave is much less important than how you behave." — Benjamin Graham

Benjamin Graham is known as the father of value investing. He was Warren Buffett's professor and mentored him at Columbia Business School, where Warren got his MBA. He understood the importance of patience in investing.

Patience is the ability to keep a good attitude while waiting.

It also takes patience and discipline not to chase mediocre investment opportunities. Our instinct is to act and deploy a pile of cash. It takes discipline like a baseball batter not swinging at bad pitches and having the patience to wait for their pitch.

Like Charlie Munger, Buffett's partner, said, "It takes character to sit with all that cash and to do nothing. I didn't get where I am by going after mediocre opportunities."

The benefits of investing are typically reaped after many years. It's letting compounding work its magic. Patience is a behavior where the benefits are long-term. To be patient is to endure short-term hardship for a future reward.

Warren Buffett considers patience as a defining trait of successful investing. And lack of patience an investing flaw.

"The stock market is a device to transfer money from the impatient to the patient."

— Warren Buffett

Siddhartha's wisdom can help us be better investors by doing less. By doing less, we can avoid mistakes by being less wrong.

We can learn to be patient and stick to our investment strategy. We can learn to avoid emotional decision-making mistakes.

Time is on your side.

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I write think pieces crafted to entertain. I cover the waterfront: business, money, investing, technology, leadership, relationships, health, and fitness.

Albuquerque, NM
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