January 12, 2012

What’s Different About the Wealthy? They’re Patient


When it comes to governing bodies, I believe that common sense and patience have disappeared.  The definition of patience per Wikipedia: ‘It is the state of endurance under difficult circumstances, which can mean persevering in the face of delay or provocation without acting on annoyance/anger in a negative way; or exhibiting forbearance when under strain, especially when faced with longer-term difficulties.’ 

Fortunately, I think many investors have been forced to rethink their household finances and re-learn how to be patient with what they want in the long term. Those who have and continue to live comfortably today are mostly those who have been patient in life. They don’t spend what they don’t have and they don’t purchase what they can’t afford. 

As advisors, we must continue educating our clients and provide lessons on patience within the investing world. Many people think wealthy investors have a silver bullet insight into how to “get rich quick,” but in reality, most wealthy individuals have endured tough times through extreme patience and emotional control.  The wealthy investor understands the need to be patient about the marketplace and makes educated investment allocations or trading decisions, not quick trades that try to time the market.  Their decisions are not get- rich-quick-driven, but strategically risk-based and targeted to achieving specific goals, rather than just becoming wealthy. They understand the logic of taking extra risk in order to possibly achieve higher long-term growth during specific market conditions. But most of all, they understand the

need for patience!  They don’t try to predict the future; they just participate in the present and wait on a great opportunity so they can take advantage of the future. 

As illustrated by the graph below, the average total return of the S&P 500 from March 1928 to September 2011 was roughly 9.39% per year. However, when broken out between capital 

appreciation (growth) and dividends, the illustration is a real eye opener. Of the 9.39% total return, only 5.13% per year was attributed to capital appreciation (growth), while the other 4.26% per year is attributed to dividends.

Impatient investors tend to miss the importance of the dividend. Most clients tend to believe that only bull markets are profitable and that bear markets never are. However, the missing piece of that thought process is exactly what this graph illustrates. Non-patient investors don’t understand the compound effects of dividends and their reinvestment effects on long-term growth. You have to be invested in the market to get the dividend!  

Some of my favorite quotes from “The Wisdom of Great Investors” speak volumes on the importance of patience:

  • “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”—Benjamin Graham, the father of value investing 
  • “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”—Peter Lynch, legendary investor and author
  • “Be fearful when others are greedy and be greedy with others are fearful.”—Warren Buffett, billionaire investor 
  • “You make most of your money in a bear market; you just don’t realize it at the time.”—Shelby Cullom Davis, legendary investor

While the complexity of managing money and building client portfolios is far beyond the simplicity of just owning the S&P 500 or Barclay Aggregate Bond-comparable investments, the true basics never really change. Advisors as well as investors have to be patient in order to endure and grow their assets within reason. The “get-rich-quick” approach will always lead to some form of humility down the road, especially if the investor’s view of that option is not properly educated. It never hurts to have a lesson every now and then that teaches us to have a little more patience in our decisions.  



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