Patience
Where the return from holding actually comes from, the two forms patience takes, and the situations where it becomes a mistake.
Patience gets treated as a personality trait, and part of its return is arithmetic. An investor who holds a good asset keeps money that a frequent trader gives up, in three measurable ways, before any question of judgment arises.
The difficulty is that holding does not feel like doing anything, and it feels least like doing anything at the moments it matters most.
1 · Where the return comes from
| Source | How it works | Scale |
|---|---|---|
| Deferred tax | Sell at a gain and the tax leaves the account and stops compounding. Keep holding and that money stays invested | Grows with the holding period and the gain, and over decades it is often the largest of the three |
| Trading costs | Spreads, commissions where they still apply, and the drag of a portfolio in constant motion | Small per trade, and it compounds with turnover |
| Fewer decisions | Selling and buying back are two chances to be wrong rather than one | Hard to measure, and often the most expensive, because the worst decisions cluster in frightening markets |
Charlie Munger put the point in a sentence: “The big money is not in the buying and selling, but in the waiting.”
2 · Two kinds of patience
Waiting for a price and investing on a schedule are both patience, and they suit different people and different stages of life.
| Patience of conviction | Patience of consistency | |
|---|---|---|
| What it does | Waits, sometimes years, for a business worth owning to be priced sensibly, then holds it | Invests a set amount on a schedule regardless of the market |
| What it requires | Knowing what a business is worth, and capital available to act | A decision made once and automated |
| Where it fits | Capital already accumulated, a long horizon, and the temperament to hold through a bad stretch | Building from income, which is most people for most of their lives |
| How it fails | Waiting so long that nothing is ever owned, or holding after the business has changed | Stopping the schedule in a falling market, which is when it does the most good |
Many households use both, and the mix shifts as a life does. The useful question is which one a particular person will actually carry out.
3 · Waiting for a price
The opportunity comes from a good business being priced as an ordinary one, which usually requires a story frightening enough to keep others away.
The pattern repeats without the names changing much. A widely held business trades at a multiple more typical of one in decline, because the prevailing view is that its best product is behind it, or that a new technology is about to make what it sells unnecessary. Nothing about the business is hidden; its products are in everyone’s hands. What is required is a judgment that the market has the business wrong, and the willingness to wait until it is priced that way.
That is a way of thinking rather than a result. Plenty of businesses have looked cheap for the same reasons and were cheap because they were in trouble. The Direction of a Moat covers how to tell a frightening story from a real change.
4 · Investing on a schedule
Most people are building from income rather than deploying accumulated capital, and a schedule handles that better than judgment does.
Investing a fixed amount at regular intervals buys fewer shares when prices are high and more when they are low, without anyone having to decide which kind of month it is. Research has generally not found it superior to investing a lump sum. Its advantage is that it gets carried out, including in the months when a person would otherwise stop.
Declines are the part that tests it. A schedule turns a falling market into lower purchase prices rather than an event requiring a decision, and the households that keep going through those stretches tend to end up with more than those who wait for clarity.
5 · What a large decline tests
A large decline tests whether you own a business you understand or a stock price. That gets settled before the decline, not during it.
Almost every meaningful investment falls substantially at some point. What happens next depends on whether the owner understood what they held, sized the position so a bad year was survivable, and had a reason for owning it beyond the price going up. A sale at the bottom converts a decline into a permanent loss, and the decline itself was not the thing that did the damage.
Before buying anything, write down what would have to be true for you to be wrong.
Then, when the price falls and the urge to act arrives, read the list. If none of those things have happened, the decline is information about the price rather than the business. If one of them has happened, that is worth knowing too, and the list is what tells you.
6 · When patience is the mistake
Holding is not a virtue on its own. The same behavior that produces the returns above also produces the worst outcomes in investing.
| Situation | Why holding hurts |
|---|---|
| The business has actually changed | The advantage eroded, the industry shifted, or the numbers confirmed it. Holding here is refusing to update |
| The thesis was never tested | A position held for years without ever being re-examined is a habit rather than a judgment |
| Concentration outgrew the plan | A winner that became most of a net worth is a different risk than it was when it was bought |
| The money is needed sooner | A horizon that shortened makes a long-term position the wrong holding regardless of its quality |
| Patience is standing in for avoidance | Not selling because selling means admitting a mistake, or paying a tax |
Conviction and stubbornness are hard to tell apart from inside a position. The written list above is what tells them apart.
Where this lands
Holding pays three ways before anyone judges a business: tax that stays invested, costs not paid, and decisions not made. Waiting for a price suits someone with capital ready and a view on what a business is worth. Investing on a schedule suits someone building from income, which is most people most of the time. A large decline tests work already done. And patience turns into a mistake the moment the business underneath it changes.
- Holding produces return three ways: deferred tax that keeps compounding, lower trading costs, and fewer chances to decide wrongly.
- Deferred tax is usually the largest of the three over long periods, because the money that would have gone to tax keeps working.
- Selling and buying back are two chances to be wrong, and the worst decisions cluster in frightening markets.
- Waiting for a price and investing on a schedule are both patience. The right one depends on whether you are deploying capital or building from income.
- Investing on a schedule is not mathematically superior to investing a lump sum. Its advantage is that it gets carried out.
- A good business priced as an ordinary one usually requires a story frightening enough to keep others away, and plenty of cheap businesses are cheap for good reason.
- Write down beforehand what would have to be true for you to be wrong, and read it when the price falls.
- Patience can become a mistake when the business has changed, when the thesis was never re-examined, when a position outgrew the plan, or when the money is needed sooner.
- The difference between conviction and stubbornness is not visible from inside a position.
A plan makes patience possible.
An investor who can hold through a hard year usually has a financial life built to allow it. We do this with clients, matched to you.
How we work →Educational content only. This article is for informational and educational purposes and does not constitute personalized investment, tax, or legal advice, and does not create an advisory relationship. The example described is a general pattern rather than any particular company, and is not a recommendation. The firm and its related persons may or may not hold any security, fund, or asset class mentioned, and any such position may change at any time. No return, outcome, projection, or performance is shown or implied anywhere in this article. All investing involves risk, including possible loss of principal, and past performance does not indicate future results. Tax treatment of a sale depends on individual circumstances; deferral is not avoidance, and tax is generally owed when a position is sold.
Charlie Munger is quoted once, from his publicly documented remarks, and Warren Buffett is referenced for his publicly documented approach. Neither has any connection to, or endorses, TenBroeck Wealth Management.
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Written by Schad TenBroeck, CFP®, Principal. CFP Board owns the marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States.