The markets can remain irrational longer than you can remain solvent. - John Maynard Keynes
There can be no opportunities for very long period of time in the market.
There is a high probability that most of the people would just jump onto the train if they see that others are making money and their thesis has not worked out yet.
The problem here is that there is a very thin line between being dumb and smart.
For example: having a heavy portion of your portfolio in your highest conviction stock is smart but only until you realize your thesis was dumb.
The line will never be gone, it could get much more visible as you learn and grow, but will always be there.
Let me be clear here.
This article is not about how the broader index is behaving or whether its overvalued or undervalued.
Its about the general penitence one needs in investing.
First of all congratulations, if you agree that one must wait for the opportunity and bet when the odds are in favor like having margin of safety, clarity in business performance, etc. then you are on the right path.
Unless we both agree on the above statement, this article is of no use.
Coming back to the title of this post: HOW LONG?
There are two questions here:
- How long can you stay invested (Yes, stay)
- How long can you not stay invested.
Most of the investors out there focus on the second question as that is much more important with regard to one’s behavior.
Ask yourself, how long could you live without taking money out of your stock, assuming that the thesis has not changed.
A person can only stay invested when they have some other source of income and their spending habits are in control.
Frugality is the key here. If the earnings of the company compound so does your savings by staying frugal.
When one’s needs are below their income then holding on to stock becomes relatively easy than from a person who has to
- Pay EMIs
- Live on paycheck to paycheck.
- Report stock performance to boss
- Show good returns every year otherwise the clients would back out
If one falls into any of the above category then staying invested becomes difficult.
Second point: how long can you not stay invested?
There are many factors which affect the answer to this question like (not an exhaustive list):
- What is your investor circle doing? If they are buying, then holding cash can be difficult for you specially if you are a beginner.
- Are you managing other people’s money? Then holding cash does not make sense in the eyes of your client.
- When did you start looking for opportunities? Timing is also very crucial in an investor’s life. If one starts to look for opportunities when the market is at bottom then there will be plenty of fish in the sea, but as the market reaches the upper extreme less and less fishes are left to hunt (which also means more work needed to hunt them down).
If you have constructed a portfolio of 8-15 stocks consider yourself lucky that you got the opportunity and the correct mindset to construct it. Now the only job left is to wait (Plus, keep track of your business).
Its very easy to say that make a portfolio of stocks or diversify but its going to be a long process.
Having 10 stocks in a portfolio for me would mean that I must know in-and-out of the companies.
Why? because having complete knowledge about it would help me have my conviction built and stay invested during the price fall.
But How Long does not apply to people who are already fully invested.
A Different Thought
I am going to say something counterintuitive here: When there is no need for money that’s when you get the money.
What I mean here is when in life you don’t run behind money for short term, then chances of you getting wealthy are much higher.
Why? because when you stop caring about money you start learning.
There being no need for money could be because you are already privileged enough to have money or your expenditure is so low that, money won’t change much of your lifestyle.
Let me share my experience
Due to this pandemic, all the colleges shifted to online means of conducting classes and as this pandemic restricted our lives in lot of ways it was very stressful for many of us to cope with sudden life changes.
Therefore, to not add to that our college had gave us an option to select an option to not grade you on any subject which you don’t want to be graded on.
So I did a little experiment. I decided to attended only those classes which interest me or seemed important and totally ignored the ones which did not seemed useful for my future.
The time left after out by skipping those classes, I would use that into doing something for which I would not need any motivation to work on: INVESTING.
Coming to the end, the experiment went well. Things I learnt about investing in these months was more than I had studied in my previous years of investing.
Such intense spending of time on what you love to do just puts you on a different level where you don’t do things because you are told to do or have to because of the needs but just because you are curious.
This experiment made me realize that the learning experience just becomes wonderful when there is no need to learn and the only motivation you have is your passion or curiosity.
Look at Portfolio Managers. They qualify the test of curiosity as there are great fund mangers out there whom I admire.
But they do not pass the test of need. The structure of the industry is such that one has to keep showing good returns consistently or else client will pull the plug.
This leads to your style of investing being more tilted towards showing returns (short term + below average long term).
These fund managers are also restricted by regulations or policies on what type of company they can buy.
Sometimes there can be times (like right now) when the market will go up and you might not have joined the uptrend and everyone around you is making money but for a person who is focused not on short term gains but rather on long term wealth, which is sustainable, then one can sit back and wait for the opportunity.
Just watch this interview of Warren Buffett and look at his confidence. He just resisted the tech boom and it doesn’t matter to him.
Here is another video to explain what I mean.
However long it takes, don’t give up and lower your standards of quality. Sit tight wait for the right opportunity, but one can only do so when there is no need for money.