Investment Selection and Patience Are Keys to Long-Term Success

I’ve been fielding a lot of questions on my website about how to take advantage of the current market. The market is bullish, so many feel it’s time to go all in. In response, I caution patience and selectivity. If we ignore our selection criteria to take advantage of a hot market, we make one of the classic mistakes in investing: seeing opportunities because we want them to be there, not because they’re actually there.

Expecting ideal investment opportunities to come your way when you have the cash to invest is a great way to achieve marginal returns. It doesn’t matter how ready an investor is to get cash into an investment opportunity. Opportunities will come when they want to, completely independent of the investor’s cash situation

Many investors get this backwards. Both amateur and professional investors (even value investors) fall into the trap of thinking that a great investment opportunity should be there just because they want it to be there. There are all sorts of pressures that can influence this mindset. Professional pressures to avoid subpar quarterly performance. Personal pressures to avoid the feeling of being left out as the market surges. When an investor really wants an investment opportunity to be available, he will often tweak facts about an investment to make it more attractive. And the farther the investor gets from reality, the more mistakes he’ll make.

Warren Buffett has often said he likes to wait for the perfect pitch. He has compared investing to a game of baseball with no called strikes. In that version of baseball, the investor can stand at bat and wait all day for a great pitch before swinging. One might still hit into some outs, or even strike out from time to time, but that batter would have a hall of fame batting average. Selectivity is the key, only swing at the juicy pitches and your chance of long-term success goes way up.

What’s surprising to most people is that inactivity is an incredibly valuable core strategy. The investing world is full of fortunes one and then lost by trading actively. This approach is akin to gambling, where wild swings induce more activity. Those investors that make fortunes and keep them over the decades build slowly on a portfolio of stocks that fit their strategy, and show patience with the stocks they own and with new opportunities.

At times holding cash in your portfolio can be a key strategy. Cash helps us take advantage of market drops and it allows us to move quickly when opportunities arrive. Benjamin Graham was fond of doubling down on the value stocks that he already owned when they become cheaper. Cash is handy for this. Of course, it is always a balancing act. The more cash you hold in a bull market, the more of an advantage the market has over you. Cash will slow your portfolio performance compared to the market average in the short-term, but it will give you a big advantage when corrections present themselves.

A cautious and selective approach is especially necessary during market peaks. It can be trying for a disciplined investor to sit back and invest only in ideal opportunities while growth investors take high velocity rides on companies like Tesla Motors. But most of those overvalued rockets fall back to earth. And of course, once they’ve fallen, that’s when we can start using our cash to take advantage of value opportunities. A recent Liberty Hill Investing example is OpenTable, which peaked in 2011 at about $110 with terrible valuation. When that rocket crashed, it dropped down to about $35 by the end of 2011. I loved the company in early 2011, but wanted a better margin of safety. My patience paid off and I started adding it to client accounts in 2012 in the $40s and $50s. It was recently acquired at about $103.

So, selectivity, patience, and inactivity can be an investor’s best friend. I will continue to add positions to client accounts here and there as opportunities arise, but I’ll keep my target of 15% cash so that we may add some real gems when a correction occurs.

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