Investing success: Be patient

It’s really tough to find anything attractive as a short-term investment these days. There are lots of stocks that should do well in the long term, especially in the battered high-tech sector. Nortel, for example, may not yet have hit bottom, but my guess is that three years from now, the recent price of $11.33 will look like the bargain of a lifetime.

There are plenty of other examples of shares that will do well over time, including Bombardier, Calpine, Four Seasons, MDS, and Thomson. But all will require some patience.

Irwin Michael, one of Canada’s top value investors, has repeatedly reminded us of his mantra for successful stock market investing: patience, patience, patience. Unfortunately, many investors don’t seem to have gotten the message.

When Canadian Natural Resources dipped shortly after I recommended it, I received e-mails asking if the stock should be held or sold. Ditto with Calpine and PrimeWest. In fact, almost any time a stock drops, someone writes to ask if it’s time to bail out.

Buy quality, wait
It appears that many investors have forgotten what patience is all about. It means, quite simply, buying quality surities and staying with them until one of two things happens:

    1. The underlying fundamentals change, forcing a re-evaluation.
    2. The market recognizes the value of the security and we take profits.

Either event can take months, perhaps even years, to materialize.

I think that a large part of the problem can be traced to the “instant win” psychology that emerged during the runaway boom markets of the late ’90s. The huge run-up in tech stocks generated big gains almost overnight.

Back to basics
Day trading became a North American passion. Initial public offerings (IPOs) of new companies IPOs tripled and quadrupled within hours of their opening trade. Newcomers to the stock market were given the impression that’s how it always worked-buy today, sell tomorrow. The concept of immediate gratification took root and we’re having difficulty shaking it, even though today’s markets are very different indeed.

We need to get back to basics. Investors have to recognize that stocks don’t turn on a dime under normal market conditions. Profits accumulate gradually, over a period of time, through a combination of capital gains and dividends.

Look at it this way. If you could buy a high-quality bond today that yielded 10 per cent annually, would you do so? Most people would jump at such an offer. But if you were given a recommendation on a quality stock that had a good chance of producing a 10 per cent a year return over time, would your reaction be the same?

Long haul focus
For many people, it wouldn’t. That seems like a very dull return in the light of recent experience-even though the 10 per cent stock gain would in fact be worth considerably more than the bond yield because of the tax advantages of capital gains and dividends.

We need to get things back into perspective. A stock portfolio should be built for the long haul. Keep the focus on high-quality stocks, preferably those that pay decent dividends, and let market forces take their course.

Aim for an overall annual return of 10 per cent. You’ll probably end up doing better than that, and your risk level (and blood pressure) will be considerably reduced.

Adapted from the Aug. 13 edition of the Internet Wealth Builder.