Don't Settle for "Good Enough"

The real secret to successful investing: time and patience. That's it. But in the world of investing, those two can be hard to come by. If we ignore them, and settle for "good enough," we could miss out on those multibaggers that can really boost our portfolios.

You, me, your colleague in the next cubicle -- we're all human. We have certain built-in tendencies that, for our investing health, we should try to overcome. One such tendency is focusing on the short term.

Investing behavior?
Suppose you've gone through the trouble of finding a good company in which to invest. It doesn't matter whether this is through your own research, or by following someone else's. All that matters is that you've picked a good company and bought some shares. Then it happens.

You check its price every single day, sometimes twice a day. You fret and worry when the price goes below your purchase price, doubting the wisdom of your pick. If the price goes up, you feel good, telling yourself that this is the one that will make you rich. When the price goes back down, though, those good feelings evaporate, turning into worry again.

In three months, the price has risen 20% -- just as Unisys (NYSE:UIS) has done recently -- and you begin to wonder whether you should protect that profit by cashing in. I'm sure you've heard the old adage, "you can't go broke by taking profits." While that may be true, you sure can end up a lot poorer than if you had just sat on your hands.

Time and patience -- if you want those really big returns, that's what it takes.

Results of "good enough"
Consider the following. If you had invested in Yum! Brands (NYSE:YUM) five years ago, you would have realized a 37% return in less than eight months. "Good enough," you might think, and worth mentioning to that colleague of yours. But, if you had held through today, you would be sitting on a 152% return. Plus, you would have avoided those pesky short-term capital gains taxes and the bother of finding someplace else to invest your money. Would that someplace else be as successful? Maybe, maybe not.

This same phenomenon plays out in other companies, too. Through normal -- and sometimes abnormal -- short-term movements in price, we can make 20% or 30% or more in less than a year. But if we ignore the keys of time and patience and let ourselves be satisfied with "good enough," we could miss out on even bigger gains.

If you routinely leave that kind of money on the table, you are not alone. Even Peter Lynch confessed to selling too soon. In One Up on Wall Street, he recounts how he purchased Warner Communications for $26 per share and sold at $38 for a 46% gain, because he was concerned about it being overextended. It peaked at $180, a 592% jump from where he bought it. He urges readers to avoid that kind of mistake, saying, "But when you've found the right stock and bought it, all the evidence tells you it's going higher, and everything is working in your direction, then it's a shame if you sell [too soon]."

An alternative
Finding good stocks is only half the battle. Time and patience make up the other half. At our Motley Fool Stock Advisor investing service, we've found good companies to hold for the long term. In the four-and-a-half years of the service, Fool co-founders David and Tom Gardner have an average return of 68.9%, compared to the market's 26.1%. But looking at their recommendations from the first two years of the service, their average return is 128% -- more than three times the market's 42% gain.

Repeat it with me: Time, patience, good companies. For help on that last front, you can check out two of David and Tom's best ideas in The Motley Fool's 2 Top Picks, a new special report you can access for free by clicking here (no credit card required). Here's to not settling for "good enough."

Fool contributor Jim Mueller has less time and more patience than he used to, a few years ago. He does not own shares in any company mentioned. The Fool's disclosure policy won't take much time to read.