Patience may indeed be a virtue, but when it comes to investing it seems we're all in a hurry, filled with the vices of avarice and greed. All too often, we feel that we must buy a stock rightthisminute or else the train will surely leave the station without us. Instead, we just end up on the wrong track.
Growth investors are often guilty of this investing "sin," feeling that because the stock is moving up they better climb aboard. Did Hansen Natural (Nasdaq: HANS ) double from $18 to $36 and then double again to $72? Let's buy in! And momentum investors, well, they're simply a highly caffeinated version of growth investors. They're not even concerned with what the company is, so long as it's going up, and going up fast! GeoGlobalResources (AMEX: GGR ) just ran from less than $1 to more than $8? Better get in line as we run it up more! Just watch out below when they plummet back to earth.
The rest of us need to take care to invest not only in the right stocks, but at the right price and at the right time. Jump in too soon and we can catch the cliched "falling knife." Jump in too late and we'll indeed have missed our chance to maximize our returns. Patience is a valuable key to winning investments. And profits.
Magical elixir called "patience"
So how do we go about acquiring this mystical stuff called "patience"? Well, it certainly takes time. I think most every investor at one time or another has hastily purchased a stock, and has been burned in the process. Even though my mother used to tell me that "the burned hand learns best," I'd rather know ahead of time the right moment to buy a stock instead of walking around with blisters and bandages.
One of the primary techniques to attain patience is, quite simply, to do nothing. That's it. Don't buy. Don't sell. Don't watch CNBC. Just ignore the market and wait. Actually, you do have to do something. Use your time ignoring the market to get to know your company. Know it, understand it, value it. And once you get a good idea of what your company is worth, just wait some more.
It took me a long time to understand this principle of value investing. The stock market at times is quite exuberant and at other times quite depressed. Master value investor Benjamin Graham described it as a manic-depressive friend who is always willing to give you a price for your company. Some days he is upbeat and overvalues your stock. Other times he is downcast and undervalues it. And more often than not, he over- or undervalues your company again and again. It just takes time for him to switch moods. Just look at what happened to Varian Medical (NYSE: VAR ) after the cancer treatment firm reported weaker earnings earlier this year. The market punished it for the lackluster performance, but failed to consider the growth potential of its market. Varian, which had been cut by one-fourth, has since climbed back up more than 56% and sits at a new 52-week high.
And that's why we wait. Because the stock market has been wrong in the past about the value of our company, we can be assured it will be wrong about it again in the future. If we are willing to wait -- if we are just patient -- the stock market will give us the price that we want to pay for our company.
No one knows this principle better than Philip Durell, lead analyst of the Motley Fool Inside Value newsletter service. Since he began more than a year ago, Philip has been patiently picking undervalued companies and just as patiently watching them beat the market as investors realize their value and bid their prices up. To date, Philip's recommendations are up 10.6% on average, compared with an S&P 500 gain of 7.13% for the same time period.
Philip has the patience to find good companies and then wait until they come down to his price before pouncing on them. For example, checkbook and tax software maker Intuit (Nasdaq: INTU ) was an Inside Value pick beaten down by one of the market's manic overreactions. Intuit faces consistent competition from both Microsoft and H&R Block (NYSE: HRB ) . It's a $9.5 billion company that produces nearly $2 billion in revenues and free cash flow in excess of net income. Philip's call to profit from this perennial cash flow producer was timely -- investors have seen their shares rise 41% in less than a year, versus the market's 4% rise.
That's what happens when Mr. Market overreacts to bad news or even no news. Opportunities arise to allow savvy investors to step in. If you've priced it right, you can profit handsomely.
Catalyst for a fresh start
Yet bad news and a deflated share price don't necessarily make for a value pick. Heck, you can look at any financial paper and see stocks hitting all-time lows on a daily basis. It requires you to understand the company and what's going to change the thing that's wrong with it.
Look at the state of the airline industry today. Airlines are struggling to cope with higher fuel costs, excessive debt, and the lingering effects of the Sept. 11 terrorist attacks. Around the time Philip was recommending Accenture (NYSE: ACN ) , the former consulting arm of Arthur Andersen, to subscribers -- and realizing a subsequent 18% gain for them -- airlines like United continued their inexorable slide toward bankruptcy and have landed in penny stock territory. The stock that used to trade at $50 and was down to $1 in July. Good time to buy, right? Not so fast! Fewer passengers and the continued high price of oil have sapped the strength of this once-preeminent airline. The stock is now down another 50% from those summer lows, and the pain doesn't seem to be over.
To give you an idea of how much a little bit of patience can affect your returns, consider the following:
|
Company
|
Seemed low at
|
Actual low
|
Return since seemed low
|
Return since actual low
|
|
Varian Medical*
|
$36.20
|
$31.65
|
40%
|
60%
|
|
Intuit**
|
$42.12
|
$37.24
|
27%
|
43%
|
|
Accenture**
|
$24.00
|
$21.00
|
16%
|
33%
|
*May not still be a value.
**Denotes current Inside Value pick.
What ingredient of success did Philip see in Accenture that others ignored? And equally important, why was it not present in United?
In Accenture, Philip saw a company that didn't require strong capital outlays (like the airlines do). He saw a business that offers high investment returns and generates free cash flow at least equal to net income. Where United was decimated by adversity, Accenture used the adversity that wiped out its parent (Arthur Andersen) to its benefit. The consultancy has little debt, a flexible business model, and a partnership structure that has shareholders in mind. Moreover, Philip is willing to wait for the companies he likes to reach his price. Those who jumped into United at $15, $10, or even $5 did so too soon, as did those who jumped in at $2. The catalyst for Accenture is its diversification across various industries that demand its services. United is still coming to grips with its finances.
Catching the exact top and exact bottom is not necessary to handily beat the market. Beating the market requires the patience to wait for the right buy-and-sell price. Doing so requires that you learn about your company, value it, and then wait for the market to give you that price as it invariably will. Moving too soon can hurt you. It may just be that value investors are really virtuous investors.
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This article was originally published on May 6, 2005. It has been updated.
Fool contributor
Rich Duprey
does not own shares of any company mentioned in this article. Microsoft is an Inside Value recommendation. The Motley Fool has adisclosure policy.
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