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The Three P's of Investing

I recently returned from a vacation in the Williamsburg, VA area. It was fascinating to see and learn about the rich history of the United States. While there, I learned some astounding information in a movie entitled “The Road to Yorktown” at the Yorktown Victory Center regarding the history leading

I recently returned from a vacation in the Williamsburg, VA area. It was fascinating to see and learn about the rich history of the United States. While there, I learned some astounding information in a movie entitled “The Road to Yorktown” at the Yorktown Victory Center regarding the history leading to the Battle of Yorktown which was the last major land battle of the American Revolutionary War in the North American theater and effectively ended the war. The movie, speaking about George Washington who was the Commander-in-Chief of the Continental Army, states: “Under his command we hadn’t had a victory in four years. But now we sensed we were nearing the ultimate test. Yorktown.”1 In fact, the American military teetered upon total collapse yet Washington persevered. Continuing without winning for four years and with his forces near collapse really required some perseverance and patience for George Washington. What I found inspiring about this history is that great things take time and hard work. I think we are often too impatient and want immediate results in this day of instant food, instant messages, and instant everything.

The first seven months of 2015 haven’t been the easiest for investing as the broader markets are barely up so far this year. Over the past few weeks I’ve been noticing the noise as investors and traders increasingly beat the drum of the difficulty of the market. If you listen to the major media, there is lots of talk of the recent downtrend in the market. I think what many people forget is that investing is a game of patience. It is a marathon and not a sprint. Success can take years just as it did for George Washington and his Continental Army. My statements here are not meant to be a prediction on the direction of the market as that is very difficult to do. Rather, it is more to talk about the investment process including the patience and perseverance that is required to succeed. Furthermore, keep in mind that the markets are only a few percent off of all-time highs. So, while this hasn’t been an easy year, it still isn’t that bad.

My own investing career has had many times where patience and perseverance were required. I started investing in the early 90’s when I coat-tailed my father’s investments in small bank stocks. In late 1999 I started picking my own stocks for investments. I had some small success in 1999. The year 2000, of course, was much harsher although I fortunately didn’t invest in the highflying stocks of the technology world. Through the end of 2002 I was up only a few percent. I had spent over three years of hard work learning and investing in the markets and I hardly had anything tangible to show for it. My patience and perseverance paid off in 2003. It was a great year as I was up 89% for the year. It took me four years of learning, work, and patience to have success.

There is another major time in my investing career that required a lot of patience and perseverance. It was early 2009 and the markets were near their lows in the crash that may be of the biggest magnitude I will see in my lifetime. I remember being near ready to give up on full-time investing. I specifically remember a conversation with my mother at that time. She wasn’t an investor but was a very wise woman and was extremely conservative financially and otherwise. When I told her that I was thinking of going out and finding a job, she encouraged me to continue. That little bit of encouragement, especially with my mother’s conservative nature, inspired me to continue for a while longer. Soon the market was moving up again and I was able to get back on my feet. Had I not persevered, I probably wouldn’t be writing this article today.

Success in investing takes time especially as you are starting out. Typically, you will not have immediate success. However, with some patience and perseverance I believe that anyone that has motivation and the right temperament can be successful. Results in investing often can’t be measured in weeks or months. It usually takes years.

So what does that mean and what should investors do? First, let’s not confuse patience with prudence in cutting your losses. We need to have the wisdom to know when to hold a stock and when to fold. What it does mean is that investors need to wait patiently while continuing in their investment process. I believe that an effective investment process needs to contain a balance of activities including learning about investing, continuing to do home work on existing positions, search for new ideas, and monitoring the macro trends. If you keep doing these activities and are smart about your investments, you should eventually be successful. You can’t stop doing these activities just because your portfolio is down.

Researching new ideas when the market is declining is something I want to delve into a little further. It is easy to be motivated to look for new ideas when your portfolio is hitting new highs as you are making money. Ironically, often the most important time to be looking for new ideas is when the market is pulling back. That is when fewer investors are generally looking and when the bargains can be had. Investing is often counter intuitive. To be most successful, you need to be doing the opposite of what the herd is doing. The famous Warren Buffett quote comes to mind. He states: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Another famous quote that comes to mind is one by Peter Lynch. He said: “I’ve found that when the market’s going down and you buy funds wisely, at some point in the future you will be happy.” Now I’m not necessarily saying that now is the time to buy. However, the best purchases are usually made during market declines.

One personal example shows how researching new ideas during a market decline is one of the best times to be looking. Probably my all-time best purchase so far in my career was in PFHO in 2011. Ironically, I found it on August 12 at $0.55 during a period where the market was crashing and was highly volatile. At that time, nobody was interested in looking for new ideas. I remember that trade as clear as yesterday. I was sitting in a hotel room, saw the news of a great quarter, and purchased shares. The stock was very illiquid, I knew I would either make a lot of money or I was going to sell for a substantial loss but was pretty confident in my purchase. As things turned out, the former was the case as I sold a block of those shares in 2014 at $58 for more than a 100 bagger.

When I first started full-time trading and investing I even had a written plan that stated that I was going to investigate five new companies a week to make sure I continued to look for new ideas. That rule helped ingrain a practice of continually searching for new investment ideas. I try to never stop looking for new ideas, as you never know when or where you will find the next idea.

If you want good or even revolutionary results in your portfolio, you are going to need to have patience and perseverance as well as a mastery of your emotions. Sometimes having a wise mentor or significant other to support and encourage you is important, as success in investing is just as much of a psychological game as it is a game of finance. I think it is wise to keep in mind the phases of investing psychology that are shown in this article. Understanding your own emotions is important, as you need to make sure they don’t lead you astray. Success doesn’t come without work. That work is even more important when the going gets tough than when profits are rolling in. I firmly believe that most people have the ability to succeed in the stock market. Yes, you too can do this!

1 I would like to extend a special thanks to Tracy Perkins of the Jamestown-Yorktown Foundation for providing the exact quote from “The Road to Yorktown” movie.

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