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The Greatest Virtue

John Lim

JASON ZWEIG of The Wall Street Journal recently proclaimed the importance of courage when investing. Courage is indeed an essential quality, especially when mustering the resolve to buy stocks when there’s “blood in the streets,” as is the case quite literally today.

Yet I would argue that the greatest investment virtue—and the one that’s currently most lacking—is patience.

According to Morningstar’s Michael Laske, the average turnover ratio for U.S. stock funds is 63%. The turnover ratio for U.S. pension funds is similar, estimated to be 70%. The latter would imply an average holding period of just 17 months. That’s nuts. Do we really believe that a thoughtfully constructed portfolio should be remade every year and a half? Think of the excess fees incurred from so much turnover and the tax burden for those trading in taxable accounts.

Warren Buffett says his favorite holding period is forever. That may be slight hyperbole, but it’s not far from the truth. Studies have shown that investors err badly when selling stocks and would be better off doing nothing.

Nowhere is the importance of patience more evident than in asset allocation decisions. The past decade hasn’t been kind to value investors, nor to investors with sizable international holdings. The patience of emerging market investors is wearing very thin. It’s one thing to say you’re a believer in mean reversion and long-term investing, but it’s quite another to sit patiently for a decade or longer waiting for your thesis to play out.

It’s been said that the stock market is good at maximizing regret. One of Bob Farrell’s 10 rules of investing is, “The public buys the most at the top and the least at the bottom.” Here’s my corollary to this rule: The majority of investors will lose patience and give up on asset classes just when the tide is about to turn. The longer the period of underperformance, the fewer the investors who remain—and who stand to benefit from mean reversion.

Is this time different when it comes to value stocks or emerging markets? Maybe. There are no absolutes when it comes to investing. But I’m willing to bet that the tide will eventually turn. When it comes to value investing and investing more generally, mispricing doesn’t result from a lack of information. Instead, mispricing occurs because of how we process that information in our heads. In other words, as long as markets are dominated by human beings—with emotions and biases—inefficiencies will always be a part of the investing landscape. Remember, it’s always darkest before dawn.

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