How Thoughtful, Disciplined, And Patient Investors Prevail In Tumultuous Markets

Summary

• Whether fueled by business cycles or black swan events, market turmoil reminds investors of the importance of thought, discipline, and patience.
• Borrowing from Yogi Berra, thoughtful investors know that investing is 90 percent half common sense.
• Instead of trading faceless stocks, disciplined investors prefer owning slices of quality, enduring companies.
• And patience is the scarcest and, thereby, most valuable commodity available to retail-level stock market investors.

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Pandemics, hyperinflation, and market volatility are natural occurrences within economic cycles. Nonetheless, when markets are aggravated and lives threatened by geopolitical black swan events instigated by crazy people, I am reminded of a quote from the Irish playwright George Bernard Shaw, “The longer I live, the more convinced am I that Earth is used by other planets as a lunatic asylum.”

Thus, I was compelled to share guiding principles driven by acquired thought, discipline, and patience from influencers including Warren Buffett, Benjamin Graham, Peter Lynch, and Howard Marks, that have served our family portfolio well over several market cycles and black swan events.

Thoughtful Investors

Do-it-yourself common stock investors beat the market over time by sticking to a simple menu of time-tested, winning investment principles, strategies, and practices.

Self-directed stock investing is simple, although never easy; doable, albeit intimidating. Nonetheless, I have discovered in over twenty years of personal portfolio construction and management that uncomplicated, focused research has more significant potential to outperform the market over an extended holding period.

Treat the Consensus as Mostly Senseless

Thoughtful individual retail investors avoid interpreting the market consensus as a definitive buy or sell signal and instead conduct their own due diligence. For example, during the celebrated quarterly earnings seasons, after a company comes up short on analyst consensus estimates of earnings or revenue, the conscientious investor asks, "Who missed: the senior management of the enterprise or the Wall Street analysts?"

Nevertheless, like clockwork, herd investors ask, “At what specific price will the stock be trading next week, next year, and in the year 2029?”

My answer: I don’t know. However, I know that investing in common stocks to take advantage of the magic of compounding protected by a wide margin of safety presents an ideal scenario for portfolio success over a lifetime, in contrast to a single bull market.

Fear Losing Money More Than Missing Out

Paradoxically, a portfolio built based on the fear of losing money is destined to outperform the market over a long-term horizon than if constructed on fads or trends purchased with the fear of missing out. This is because thoughtful investors dodge the herd's FOMO and focus on protecting invested capital.

Instead of placing bets on speculative equities, thoughtful investors target wonderful companies trading at fair prices. There are few superior investment strategies available in an investor's lifetime than embracing the concept of quality plus value, further leveraged by the productive fear of losing money instead of a destructive fear of missing out.

History dictates the retail portfolios of investors following the crowd often lose momentum at market extremes. Thoughtful investors sidestep the herd.

Invest With 90 Percent Half Common Sense

Thoughtful investors buy and hold the reasonably-priced stocks of quality companies with the history—and continued likelihood—of compounding total return from capital gains and dividends across every market cycle.

Since volatile markets are perpetual, it is crucial to evaluate the downside risk and other measurements of the margin of safety in a stock price, a concept originated by the father of value investing Benjamin Graham.

I have learned through experience and observation that value investing endures as the most straightforward investment strategy in a complex financial services industry. Whether the market is bull, bear, or range-bound, all companies and their stocks in our portfolio or on its watchlist must pass a data-driven investment research checklist of the value proposition, shareholder yields, returns on management, valuation multiples, and downside risk.

By focusing research on fantastic companies with ethical management generating consistent, organic revenue growth, sustained profitability, and high returns on invested capital, market-beating portfolios are possible for thoughtful, retail-level investors.

Ultimately, for many of us, investing is about financing life's significant milestones, such as buying a home, paying for a college education, pursuing a passion, starting a business, or enjoying a comfortable retirement.

Thus, thoughtful investors advocate investing in great companies producing in-demand and profitable products or services that assist consumers worldwide in solving personal and business problems, wants, or needs.

To paraphrase baseball legend Yogi Berra, investing is '90 percent half' common sense. The 'other half' is discipline and patience.

Disciplined Investors

The more profitable approach to retail investing is putting quality before speculation. Disciplined investors reject nearsighted trading schemes that support controversial, unproven investment vehicles with limited utility for hopeful—although improbable—quick financial gains.

Filter the Noise

The economist John Kenneth Galbraith said, “We have two classes of forecasters: Those who don't know, and those who don't know they don't know.” (Source: The Wall Street Journal, January 22, 1993, C1)

Too many investors believe it is possible to predict trends, catalysts, and macro events consistently. Crystal balls are disguised in sophisticated methodologies that encapsulate forward revenues and earnings projections, and specific future stock prices. Indeed, history shows such practices are mostly the fool’s game for retail-level investors.

The nineteenth-century circus impresario, P. T. Barnum, uncovered this unrelenting human fallacy over 150 years ago. Paraphrased by a captivated media from his notorious carnival barking, Barnum implied, 'there’s a sucker born every minute.' His legendary reference to poor judgment still applies years later, and the stock market is no exception. The good news is that such market-wide irrational behavior creates profitable buying opportunities, if only temporary, and increases the potential to outperform the market over time.

For the benefit of their portfolios, disciplined investors have the courage and conviction to filter the noise of Wall Street because, unlike the movies, there are no scripted endings or guaranteed outcomes in the stock market.

Own Companies Instead of Trading Stocks

Disciplined investors learn to stop placing bets on faceless stocks and invest in quality companies. This original concept of trading equities facilitated willing participants to take affordable partial stakes of publicly traded companies. The approach remains the ideal paradigm.

They discover their circle of competence in the sectors and industries that house the common shares of their targeted companies and stay focused on mining relevant data and exercising self-control as other investors panic.

As far as trading stocks, the disciplined retail investor who is inclined to gamble drops by the local casino with discretionary dollars and, whether winning or losing, has a good time. But, on the other hand, never places bets on investment tips or perceived opportunities for quick, wishful gains.

Disciplined value investors are committed to the bottom-up, buy-and-hold investing paradigm. Avoided are arbitrary, if unreliable, price targets and alerts, deep-dive analysis paralysis, market-timing, as well as short-selling and options trading, unless thoroughly trained and practiced in those areas.

Retail investors suppress any advantages from discounted or free commissions by trading on margin or too often, thereby risking unnecessary debt, trading fees, and tax burdens on what was supposed to be a low-cost experience.

Disciplined investors contribute to society and their families by owning the shares of businesses upholding quality, compliance, competitive advantages, and shareholder value in an unpredictable world.

Patient Investors

Patience is the scarcest and, thereby, the most valuable commodity available to retail-level investors. Patient informed investors have a far greater chance of getting rich slow than getting rich fast and getting rich slowly is better than not at all.

Target a Long-Term Investment Horizon

Patient investors buy slices of quality companies when the shares are trading at reasonable prices. Then hold the investments for as long as the companies remain wonderful, including forever.

They wait for the market to throw a batting practice pitch representing a lowered price for a targeted stock created by the fleeting, shortsighted reasoning of the crowd.

Remember Benjamin Graham's philosophy as shared by Warren Buffett: "In the short-run, the market is a voting machine, but in the long run, it is a weighing machine." (Source: Berkshire Hathaway, Inc., 1987 Letter to Shareholders, February 29, 1988.)

Investors who give up on underperforming stocks held fewer than three or four years—or three or four months—forego the potential for a sizable market outperformance after five or more years of compounding.

The time-tested platform of buy-and-hold investing is alive, well, and here to stay.

Take Advantage of the Magic of Compounding

Compounding is the financial process when an investor reinvests the owners’ earnings, such as capital gains, interest payments, or dividend payouts back into the asset or portfolio with the intent of spawning additional profits from the holdings over time. This magical principle of mathematics is the primary generator of real returns from equity and fixed-income investing.

An Apple a Day

Apple Inc. (NASDAQ:AAPL) went public on December 12, 1980, at $22 per share. The stock has split five times since the initial public offering or IPO, splitting on a two-for-one basis on June 16, 1987, June 21, 2000, and February 28, 2005. The stock split on a seven-for-one basis on June 9, 2014, and a four-for-one basis on August 31, 2020.

On a split-adjusted basis, Apple’s IPO share price was a mere ten cents after adjusting the cost from the original $22. As a bonus, the company paid quarterly dividends from April 1987 to October 1995 and from July 2012 to the present. The result was a $1,000 investment during the IPO in December 1980, adjusted for stock splits and dividends, was worth approximately $5.6 million—accounting for inflation in 2022 dollars—as of the date of this calculation when the stock was trading at about $165 a share.

Apple’s captivating story of the power of compounded buy-and-hold investing reminds patient retail-level investors to forge a commitment of total return from capital appreciation and dividend payments.

It’s the Real Thing for Real Investors

Upon its IPO on September 5, 1919, one common share of Coca-Cola (NYSE:KO) traded at $40 a share, not adjusted for inflation. Nevertheless, the estates of the original buy-and-hold purchasers have enjoyed eleven varied stock splits yielding 9,216 shares from the lone original share, net of dividends.

Thus, as of this calculation, a $40 investment in one share of KO in 1919 was now worth approximately $6 million—accounting for inflation in 2022 dollars—adjusted for the splits, net of dividends. The storied history of Coke is another prime example of why patient retail investors cherish the power of annual compounding from buying and holding the shares of wonderful companies that enjoy enduring competitive advantages from in-demand products or services.

The proven way to make money in the market long-term is to remain invested for the unpredictable, albeit welcomed price jumps, cultivating a less vulnerable portfolio to sudden and unexpected price drops triggered by pandemics and other black swan events. However, unlike many in the crowd, investors must have the courage and conviction to stay invested through each market cycle to accomplish this feat.

Thought, Discipline, And Patience Prevail In All Market Cycles

As we navigate through this current market cycle of unpredictability—aren't they all—remember that thoughtful, disciplined, and patient investors seldom lose money. Although good and evil in the world are everlasting, as investors, we should remind ourselves that common sense, a commitment to quality, and taking the long view often prevail in this and all market cycles.

If just one or two of the shared principles in this post grabbed your attention, I would be satisfied and, more importantly, grateful that you took the valuable time to read and perhaps benefit.

The above principles are just the tip of the iceberg. I look forward to other thoughts on navigating market cycles and black swan events in the comments.

Be well and safe.

Disclosure: I/we have a beneficial long position in the shares of AAPL, KO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.