The Power of Patience in the Market

Patience as an Investment Discipline:

There are plenty of great companies in the market, but value is something that can never be ignored. In today’s market environment, one of the most important disciplines an investor must practice to be successful is patience. Patience is difficult to teach and is often learned from the one teacher most try to avoid: failure. Failure is often the result of insufficient preparation. This lack of preparation often leads to reactive, short-term behavior. Over time, this magnifies losses and widens the gap between investors and their desired outcomes. As Benjamin Franklin famously said, “If you fail to plan, you are planning to fail.”

Learning from Failure:

Avoiding failure firsthand often requires learning from the failures of others and understanding what can be done to reduce the likelihood of undesirable outcomes. A patient investor can do this by waiting for the right opportunity to invest in a high-quality business, thoroughly evaluating the financial health of the underlying company, and being comfortable taking positions that run counter to prevailing market sentiment.

Valuation, Psychology, and Market Discipline:

Waiting for the right opportunity to invest in a great company can be difficult and requires significant discipline, since every investment ultimately has a value attached to it. Markets often assign premium valuations to high-quality businesses, creating expectations untethered from underlying fundamentals. Economist John Maynard Keynes highlighted this phenomenon through his “castle in the sky” theory, which argues that an asset’s value is often driven more by market psychology than intrinsic value. Benjamin Graham, in The Intelligent Investor, personified this behavior through the concept of “Mr. Market,” a manic-depressive business partner who offers to buy or sell assets each day at prices driven by emotion rather than reason. Graham’s most famous student, Warren Buffett, summarized this principle in a single quote: “Be fearful when others are greedy, and greedy when others are fearful.” Together, these frameworks remind investors that long-term success is not achieved by predicting markets, but by remaining disciplined when markets lose their discipline.

Separating Volatility from Fundamentals:

Understanding the financial health of an investment prior to purchasing it is crucial. Failure to understand the financial implications of a business, particularly during periods of economic turmoil, can lead to panic selling rather than opportunistic increases in ownership. Warren Buffett has repeatedly emphasized, “You’ve got to be prepared when you own a stock to have it go down 50% or more and be comfortable with it, as long as you’re comfortable with the holding.” This does not suggest that investors ignore price declines altogether or dismiss new information without investigation. Rather, it highlights that investors must be able to tell the difference between temporary price declines and meaningful changes to a company’s fundamentals.

Speculation Without Fundamentals:

Too often, investors react quickly to market movements without fully understanding their underlying causes. These reflexive decisions frequently result in poor outcomes and realized losses. A clear example of this behavior can be observed in crypto-assets, which have surged in popularity in part due to widely publicized stories of early adopters generating outsized returns over short periods of time. While I do not hold strong opinions on cryptocurrencies themselves, they serve as a useful case study due to their extreme volatility and speculative nature. Crypto-assets closely resemble the castle in the sky framework discussed earlier, as participants often purchase these assets with the primary expectation that someone else will later pay a higher price. Unlike traditional businesses, crypto-assets lack financial statements, cash flows, or intrinsic measures of value. This absence of fundamental anchors leaves investors with little ability to assess whether an asset is trading at a reasonable valuation. As a result, periods of uncertainty or shifts in market sentiment frequently trigger widespread panic selling, placing significant downward pressure on prices and magnifying losses. In such an environment, maintaining discipline and rational decision-making becomes exceptionally difficult. For most investors, the probability of avoiding significant realized losses under these conditions is inherently low. A patient investor does not replace research and due diligence with haste, particularly in markets where valuation signals are limited or nonexistent.

The Cost of Chasing Short-Term Gains:

The final topic worth addressing is the pursuit of short-term gains, a theme briefly touched on earlier but deserving of further emphasis. Too many investors chase the so-called “it stock” without sufficient regard for the underlying business. This approach requires little discipline and often leads to disappointing results. By the time an investment becomes widely discussed, much of its upside has already been realized, leaving late entrants exposed to pullbacks or prolonged underperformance. Once again, the castle in the sky framework illustrates how investor behavior is frequently driven more by psychology than fundamentals. Following the herd rarely leads to superior outcomes and often results in average returns or outright losses. Meaningful value, by contrast, is often found in areas the market has largely ignored. Investors willing to search patiently and invest ahead of the crowd may uncover opportunities others overlook. Notably, John Maynard Keynes applied this very principle in practice, purchasing companies he believed investors would value more highly in the future. By entering positions at depressed levels, Keynes benefited from a margin of safety and was able to exit at substantial premiums as market sentiment evolved. Of course, this approach is not without risk. Investors must remain vigilant against so-called value traps, companies that appear inexpensive but suffer from structurally weak growth prospects. Still, investors should not dismiss unloved opportunities too quickly. As Peter Lynch famously noted, “the person who turns over the most rocks wins the game.”

Ultimately, patience is not a passive trait but an active discipline, rooted in preparation, valuation, and the willingness to wait while others chase certainty where none exists.