Tag Archives: patience

The Signal and the Noise (Part 3)

How can we stay focused?

Public Domain. Source: Wikipedia

We live in a distracting world. Email, Facebook, Twitter—they all cry out for attention. And it doesn’t help that our phones and tablets and computers beep and vibrate and flash at us with every new stimulus. Since companies like Google and Facebook make their living off advertising, they find ever more innovative ways to get ever more relevant advertising right in front of our noses, where we can’t ignore it.

But investing is a long-term process. The magic of compound interest doesn’t work overnight. It takes years—decades, really—of patient saving and investing for the average investor to build something significant. We need to concentrate on long-term issues even while short-term demands are literally in our faces.

One approach is to build a distraction-free space in our lives. One investor has a “library” where he retreats to read, write, and think. No electronic devices are allowed. Other people use headphones with light music or white noise to block out interruptions. We don’t have to get fancy: sometimes just going for a walk – with the phone turned off – is all we need. Whatever the approach, we can improve our signal-to-noise ratio by reducing the noise.

Blaise Pascal said that all our miseries derive from not being able to sit in a quiet room alone. Cutting out clutter is a good way to learn how to concentrate.

Douglas R. Tengdin, CFA

The Challenge of Patience

We live in an impatient world.

Photo: Mariordo. Source: Wikipedia

After running our phones down to 1%, we plug them in and expect them to be fully charged in a few minutes. We get frustrated when a webpage takes longer than three seconds to load. We would rather use the microwave than wait for the oven to pre-heat. And if youre going too slow in the left lane well were probably not friends any more.

Our culture lionizes speed: the instant celebrity, fast cars and faster planes, microsecond response times. We prefer fast food to sit-down meals, and ready-to-eat entrees to grocery shopping. We continually feel the pressure to get more done in less time. Learning to be more patient is the last thing on our minds.

But patience plays a critical role for investors. When youre patient, you play a different game than the Street analysts who focus on time horizons measured in months, not years. When youre patient, you give a business time for its fundamentals to assert themselves. Operating earnings, dividends, and a strong balance dont spring up overnight, but theyre far superior than financial engineering. And patience gives you the gift of compounding the magic that can turn a $500-per-month 401(k) contribution into a million-dollar nest egg, if its left to grow in the market at 8%.

The value of patient compounding

Theres a cycle to investing, and to life, that embodies evanescence, or the transitory nature of all things. Those that are full become empty, and the empty become full. The Japanese called this muj, Buddists call it impermanence, and in Latin the phrase is Sic transit gloria mundi thus passes the glory of the world. The grass withers and the flower fades. If you chase the latest hot investment trend, youre like the cat that chases its prey up a tree, onto smaller and smaller branches. Eventually, the branches cant bear the weight, and the cat comes tumbling down.

Patience isnt just about waiting. Its about keeping a good attitude while youre waiting. Just remember: slow food is more nourishing than fast food. And sustainable, profitable firms make better investments than femto-second coin-flips.

Douglas R. Tengdin, CFA

Sustainably Stronger

What makes some businesses stronger than others?

Photo source: Morguefile

Business analysts look for “moats”—competitive advantages that one company has over another, even when they’re in the same industry. Like the way brand-loyalty supports iconic consumer companies like Coke or Colgate. But those kinds of moats are rare. Usually, a smart product or business idea gets copied and commoditized. Those won’t give you a sustainable advantage.

But there are some things that the competition isn’t always willing to do. Strategies or habits that—once adopted—make a firm able to adapt to new circumstances and develop new opportunities.

The most important is the ability to connect with customers. At the end of the day, the customers own the business. Coke or Pepsi or Microsoft or Pfizer wouldn’t exist if no one bought their products. And empathizing with folks who use—and struggle with—the products every day gives you market intelligence that doesn’t always show up in surveys. How many times do you think Delta’s CEO has been bumped from a flight or had his bags lost?

Just as important is the ability to try new things—and abandon them when they don’t work. The world is changing, but we don’t always know which way it’s going. So we have to experiment: like Amazon’s Fire phone or Google’s glasses. Jeff Bezos notes, if you double the number of experiments you try every year, you’ll double your inventiveness. Seeing product development as a set of scouting expeditions means you’ll always have a portfolio of new initiatives—a “skunk works”—where many fail. But failure just means there’s a different path to success.

Finally, there’s patience. Rewards sit on a spectrum: small, transient wins in the short run; big, revolutionary changes in the long run. Vanguard started the first indexed mutual fund in 1976 with $11 million. The company now has over $1 trillion in assets under management. For years, indexing was called a fad, a marketing gimmick, even un-American. But by being patient, Vanguard has fundamentally changed the money management industry. Waiting longer gives you time to correct initial errors, and to get past the chaos and randomness that characterize the initial phase of any new project.

It’s not enough to be smarter than the competition or to work harder. The world is full of smart, hard-working people, and what used to be called intelligence is now automated. But firms that understand what their customers struggle with and search for innovative solutions will have a powerful advantage. That’s not a moat. It’s a runway.

Source: US Navy

Douglas R. Tengdin, CFA

Chief Investment Officer

The Compleat Investor

Is investing an art or a science?

Woodcut by Louis John Rhead. Source: Wikepedia

In 1653 Izaak Walton published “The Compleat Angler,” a short book on fishing. In this little treatise he compares angling to mathematics – something that can never be fully learned. There’s always a new approach or a new location or some novel piece of equipment. “But he that hopes to be a good angler,” Walton continues, “must not only bring an inquiring, searching, observing wit, but he must bring a large measure of hope and patience.” He describes fishing as the perfect combination of contemplation and action.

It’s the same with investing. Investors need inquiring minds, hopeful dispositions, and patience. It can take some time for an investment approach to work out. At the same time, we have to be diligent to make sure that the main idea behind our investment thesis hasn’t changed. We can’t afford to be whipsawed by every new fad or fashion that appears—but we can’t ignore how things change over time.

Good investing is both art and science. It’s a science as it applies to investments, but an art as applied to the investor. Each investor is unique, with unique objectives and limitations. Applying the right investment in the right circumstance at the right time is something that—as Walton would say—is satisfying in the result, but also in its application. Investing, like fishing, is a reward to itself.

Douglas R. Tengdin, CFA

Chief Investment Officer

Triple Crown Lessons

Can investors learn anything from the Triple Crown?

Photo: Peter Wright. Source: Pixabay

American Pharoah’s win on Saturday at the Belmont Stakes makes him the first Triple Crown winner since Affirmed earned the honor in 1978, and the twelfth in history. He’s also only the fourth Crown winner in over 65 years. It’s a hard to win all three races—the Kentucky Derby, the Preakness, and the Belmont Stakes. The races are quite different—different track lengths, different field sizes. Most horses who race at Belmont don’t run in the other two races—so they’re fresh. And horse racing is hard. These three-year old thoroughbreds are high-strung and don’t have a lot of experience in a series of demanding, stressful contests.

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Patiently Impatient

Why does the Fed talk so much?

Source: Wordsmithing Ink

Today the Fed statement will tell us that they don’t need to be patient anymore. Then Janet Yellen will give us a press conference where she’ll tell us she can be patient. We’ve gotten to the point where Fed members are telegraphing the deletion of a two-syllable adjective in their 529-word statement. What’s next: literary analysis and source-criticism? I can see it now: “Governor Brainard assented to the policy—her experience of economic stagnation in communist Poland as a young child makes her skeptical of central planning. President Evans agreed as well ….”

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