Worth the Wait?

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What You’ll Learn Today

• Patience is the most powerful lever in investing

• Impatience can be your worst enemy when investing

• The magic of compounding

• Learn why patience alone is not fool proof!

Worth the Wait

The Power of Long-Term Investing

Intro

If you’ve started your wealth-building journey in the stock market, you’ve probably heard some names thrown around, like Warren Buffett, Benjamin Graham, and Peter Lynch. Among the list of renowned investors is Charlie Munger, the former vice-chairman of Berkshire Hathaway.

Although we can’t replicate the investment strategies of these individuals, we can take informative insights away from the way they discuss investing.

As Charlie Munger once said, “The big money is not in buying or selling, but the waiting.”

This quote unlocks one of the most powerful levers in stock market investing: patience. In this article, we’ll explore the power of long-term investing and why this strategy is Raising Investor IQ approved.

More Patience, More Money

Historically, the S&P 500 (a compilation of the top 500 companies listed on stock exchanges) has returned an average of 10% per year. However, this doesn’t mean that each year the market will go up by 10%.

In fact, the market ebbs and flows based on supply and demand, industry trends, and consumer sentiment, among other things. Take a look at the graph below. What do you notice?

There are a lot of green years, but there are also lots of red years. The economy won’t be thriving every single year, but it is generally accepted that market activity with a short-term focus is more likely to be speculation while longer term involvement in the market is considered true investing.

“The strongest of all warriors are these two: time and patience.” - Leo Tolstoy

Without patience, you risk making investment decisions based on short-term factors.

For example, during the pandemic, everyone thought we were headed into a long recession. After all, the S&P 500 posted a loss of -19.44% in 2022.

If you lost your patience and sold your investments during the trough, you most likely sacrificed some money. What happened in 2023? The S&P 500 posted a +24.23% gain, recouping all of the lost 2022 returns and then some.

Impatience can be your worst enemy when investing. By playing the long game, you avoid panic selling and can work toward an average return of 10% or more. And research indicates that the greatest number of opportunities to lock in high excess returns occurs after a period of 3 years.

Let’s take a look at the price change in Coca-Cola over the years.

If you were to purchase one share of stock in 1984, you would have paid $1.29. Today, the stock price is trading for over $73, which equates to a 5,564% return! 

Many opponents of long-term investing like to contradict the method with false inflation information. Inflation has averaged less than 3% per year, meaning $1.29 in 1984 would be worth $3.91 in 2024. This is still a massive gain on your original investment, significantly outpacing inflation.

Remember, this situation doesn’t even factor in dividend income, which would enhance the level of returns even more.

Your Personal Accelerant: Compound Interest

Compound interest relies on time. By being patient with your investments, you are giving your personal accelerant more fuel to build your wealth. Compound interest is the principle that your interest earns interest. Let’s say you put $100 into the stock market with an average annual return of 10%.

In the first year, you will earn $10, bringing your total investment to $110. What happens in the second year? You no longer earn just $10. Instead, your interest income for the year is $11 because the $10 of interest earned in the prior year is now accumulating interest. Give this situation a couple of decades, and you will be making more annually in interest income than your initial investment.

Now, let’s look at this situation on a larger scale. Let’s say you start with a $500 investment in the stock market. You have the ability to set aside an additional $250 per month. Over the course of 30 years, you will have contributed $90,500. However, the balance in your account has grown to over $575,000! Take a look at the graph below.

This is compound interest hard at work. You wouldn’t want anyone making your job harder, so why make it harder for compound interest?

Longer terms and higher average annual rates equal greater effects of Compounding! If your investment consistently continues to produce solid returns, and you allow the effects of compounding to play out via long-term investing, the longer the term, the more powerful the effect of compounding and the greater push toward wealth creation! Set it and forget it is the best way to build long-term wealth.

Read more about this key fundamental concept of compounding in our previous write-up: The Power of Compounding.

Patience Isn’t Fool Proof!

At Raising Investor IQ, we fully believe in the power of long-term investing. However, patience isn’t fool proof.

If you choose the wrong investments, or don’t do proper due diligence before making any investment decisions, all the patience in the world won’t matter. By choosing solid companies with strong fundamentals and durable competitive advantages, you can work toward and even exceed the average annual return of the S&P 500 to solidify your financial future.

What does a solid value-play company look like? For one, their historical information shows positive trends. This is generally reflected in consistently growing revenues, earnings, and effective rates of deploying capital (think high levels of ROE and ROIC), with a sound margin of safety baked in. For two, their durable competitive advantage within their respective industry(ies), almost assures continued success with exceptional financial performance.

In addition, solid value-plays have a healthy balance sheet, with decent levels of growth not funded by mounds of debt. Instead, these type of companies can easily cover upcoming liabilities. If you’re investing for dividend growth, check out historical dividend information. Ideally, you want to see the company consistently raise their dividends.

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Conclusion

Patience is the secret ingredient in all successful investment strategies.

“Our favorite holding period is forever.” - Warren Buffett

As always, be sure to conduct proper due diligence and effective investment analysis before making any investment decisions. Doing so will lend confidence to your investment decisions and allow comfort in exercising patience as your investment decisions generate excellent, passive compounded returns.

By prioritizing patience, you no longer need to worry about timing the market or panic selling. The appeal of compounding motivates us to stay vested for the long-term, rather than cashing out of excellent investments at the expense of redeploying that capital to lower-paying investments.  It also negates the adverse effects of capital gains taxes, which reduce investor returns each time an investment is cashed out. It should be a key part of your investment strategy.

If you’re ready to expand your investing education and learn more about what successful long-term investing looks like, check out our other blog posts at Raising Investor IQ.

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As a Tykr affiliate, Raising InvestorIQ earns from qualifying purchases. As a Seeking Alpha affiliate, Raising InvestorIQ earns from qualifying purchases.

Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP.

The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.