Value investing, at its core, is a fundamentally contrarian investment strategy. By seeking out companies trading at a discount to their intrinsic values, value investors are inherently going against the prevailing market sentiment. This reality necessitates one key trait for successful value investors - patience. Having a long-term investment horizon and the patience to allow their thesis to play out over years, not months, is an absolute requirement for value investors. The market can remain irrational longer than you can remain solvent, as the famous saying goes. Value investors must steel themselves to endure periods of underperformance, doubt, and even ridicule while waiting for the market to eventually recognize and correct the mispricing.
The Not-So-Patient Market
Public markets are occupied by a diversity of investors - from short-term speculators looking for a quick buck to algorithmic traders executing millions of trades per second. These market participants have dramatically different goals and time horizons than the typical value investor. When a value investor identifies a company as being significantly undervalued based on careful analysis of its fundamentals, that viewpoint is often drastically different than the prevailing market price, at least initially. The shorter-term minded participants dominate the daily trading, perpetuating that mispricing through their buy/sell decisions based on factors like momentum, sentiment, or technicals rather than fundamentals.
Warren Buffett's Wisdom
Warren Buffett, one of the most successful value investors ever, has addressed this need for patience repeatedly throughout his career. As he put it: "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant." Buffett displayed incredible patience after taking a stake in the struggling clothing company Diversified Retailing in 1999. The market remained negative on the company for several years as it continued struggling. Buffett held firm, allowing management to execute a turnaround strategy. It took until 2005, but Diversified's performance and valuation eventually rebounded tremendously.
Seth Klarman's Value Philosophy
In his book "Margin of Safety," value investing great Seth Klarman preached a similar message about patience: "Value investment is at its core the martial art of competing with difficult opponents and accomplishing maximum returns through the intelligently patient deployment of capital." As Klarman recognized, going against the crowd and market sentiment requires a fighter's mentality. Value investors will inevitably face periods of market taunts, doubt from others, and perhaps even self-doubt as their out-of-favor investments initially remain out of favor. Intelligent patience is required to overcome this opposition.
Developing the Patience Mindset
Cultivating the patience required for successful value investing is easier said than done. Our human nature is wired for recency bias, incentivizing immediate gratification over long-term thinking. The following practices can help value investors develop the patience mindset:
Have a Unshakable Process: Having a rock-solid, repeatable investment process that you have conviction in is crucial for maintaining patience. When an investment thesis fails to play out initially, you can calmly revisit your analysis rather than panic selling. As long as your process remains sound, price volatility is merely noise.
Take the Infinite View: Value investors must train themselves to take an "infinite" time horizon on their best ideas. Envision holding an investment forever, not just for a few quarters or years. This mental adjustment makes short-term price fluctuations seem irrelevant compared to the long-term value you expect to accrue.
Study Past Success Stories: Reading past examples of value investors who displayed incredible patience and were eventually proven correct is motivating. Chronicles of Warren Buffett's struggles in the 1970s or Seth Klarman's decades-long winners reinforce the merit of sticking to your guns.
Size Positions Properly: Sizing your positions to embrace the inherent volatility of value investing is paramount for maintaining patience. If you are overexposed to a single thesis playing out, it becomes difficult to hold through drawdowns. Proper diversification provides peace of mind.
Find Like-Minded Partners: Having partners who share your value investing philosophy makes it easier to remain patient. A value-driven fund manager and like-minded limited partners create a reinforcing culture that weathers storms together. Going solo tests one's patience far more.
The Payoff of Value Investing Patience
While exhibiting the patience for value investing requires determination, the potential payoffs are immense. Value stocks have handily outperformed over the long run, research shows. A famous Fama/French study found that value stocks outperformed growth stocks by an average of 4.5% per year from 1975-1995. A separate study by Oppenheimer found that undervalued stocks outperformed the market by an average of 14-16% per year over a 40-year period ending in 2004.
For the value investor who can tune out the market's short-term noise and wait for their long-term thesis to be realized, those are incredibly attractive potential returns. The path is by no means easy, but adhering to a patient mindset allows value investors to reap the rewards their process merits.
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