Feb 2014 by Dan Vene
For decades we have heard investing legends Warren Buffet and John Bogle speak of the importance of “patient investing”… But what does patient investing really mean in practice for the average investor?
Today we look at some of the powerful long term impacts of following, or as the below data demonstrates, not following, Mr. Buffet and Mr. Bogle’s advice.
There are many excellent studies conducted on behavioral finance and it how it plays directly into the theme of patient capital. In short, behavioral finance is the study of the influence of psychological factors on financial markets evolution. More specifically it is the powerful emotional influence to let weekly or daily market pricing influence your buy/sell decisions. A comprehensive study of behavioral economics by Nicholas Barberis and Richard Thaler of University of Chicago Business School can be found here .
The stark reality is that the vast majority of investors are not patient at all. Many investors tend to monitor the market on a daily basis, subscribe to real time quotes, or even trade minute by minute on their mobile devices. At the surface, this would appear to produce superior returns due to “staying on top of your investments.” But the actual impact over longer time periods is exactly the opposite. How many of you felt the need to sell at least part or all of your holdings in 2008 as the market was heading south? And what about that equally powerful emotion to get back in the game after the big run mid way through 2009 or 2013? Would you have done better if you just held all the same positions and ignored the dramatic and gut wrenching price swings? The data shows the vast majority of investors would have been far better holding rather than selling on the way down and re-buying on the way back up.
Below is an excellent visual display of trying to “time the market” and not being patient through the inevitable market cycles. The net effect of trying to “beat the market” for the average investor produces returns of only one half of the underlying market performance.
So what does this mean for an investor looking at private equity fund investing as a way to diversify his/her holdings and improve overall portfolio returns?
We believe the answer is investors should not be overly focused on “liquidity” or the ability to sell out and redeem an investment if and when we enter a period of volatility. Rather, investors should focus on finding the very best fund managers who produce excellent returns through up and down market cycles. These great managers not only avoid the pitfalls of behavioral finance but take advantage of the additional value offered when other investors rush for the exit in short term market fluctuations.
This communication and all data contained herein are provided for informational purposes only and do not constitute a recommendation to buy or sell any security. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources iCapital Network believes to be reliable. However, iCapital Network cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose and has not sought to independently verify such data. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind that investing in alternative assets involves substantial risk, including the risk of losing your entire investment.