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The Power of Patience in Maximizing Long Term Wealth

 

“The first rule of compounding is to never interrupt it unnecessarily” – Charlie Munger

One of the biggest challenges in maximizing long term wealth in the stock market is having the patience to stick with your positions and process through changing market environments where different styles, industries, and asset classes come in and out of favor depending on Mr. Market’s mood.

But patience seems hard to come by these days. Why would an investor want to own boring stocks like Sherwin-Williams or Illinois Tool Works when he or she could own shiny new objects like oat milk IPOs, NFTs and dog-themed cryptocurrencies?

At a basic level it is about human nature and behavior. Human beings are wired to avoid pain and seek pleasure. If everyone else is having fun, we want to join the party. This is why investors will sell a stock that has underperformed for several years and buy whatever investment flavor happens to be in vogue. Naturally, most humans want to get rich quickly. But the real fortunes are made when investors can silence these natural instincts and avoid interrupting long-term compounding.

Slow & Steady

To illustrate the point, imagine you invested $10,000 into Sherwin-Williams (SHW) on March 17, 1980. That investment would be worth $19.5 million today – a cool 1,900x return (excluding dividends). To be sure, it wasn’t all smooth sailing. You would have had to stomach more than 15 drawdowns of over 20%, sit through several years of flat performance at a time, and avoid the temptation to take profits and pursue the fads that have come and gone. Clearly, patient investors were immensely rewarded by increasing their long term wealth.

Another example of the power of patience comes from Warren Buffett. According to CNBC, Buffett is worth approximately $100B, certainly these riches did not come quickly. The nonagenarian began his investment career at 10 years old, and 96% of his net worth today was accumulated after his 60th birthday. Berkshire Hathaway tends to own a public company stock for very long periods of time relative to other professional investors. And the businesses it has purchased outright such as Brook’s running shoes or See’s Candies are owned with a perpetual mindset. All while keeping a relatively simple, time-tested investment philosophy and avoiding fads.

The Power of Compounding

How is this compounding possible? It’s because businesses can redeploy profits into growth, which in turn generates more profits that can be redeployed into more growth, and so the cycle continues. Generally, businesses that have durable competitive advantages and management teams that re-invest profits into new products or new market opportunities at attractive returns are compounding candidates. The longer the holding period, the higher the likelihood of maximizing these benefits, thereby maximizing long term wealth

It’s easy to take profits after an investment has done well. It’s also easy to throw in the towel when a company is caught in a rut. Holding onto a stock through different market cycles will inevitably face periods of disappointing performance, sometimes spanning years. Stock prices tend to deviate from fundamentals from time to time in the short term. It is critical to not interrupt the effects of compounding if you know what you own, buy at reasonable prices, and stick with businesses that are run by exceptional management teams with opportunities to reinvest for growth over long periods of time. The power of compounding is truly amazing and the most benefits are conferred to those with the most patience. Keep calm and let the power of patient compounding work for you.

 

About the author: Zach Weiss, CPA, CFA
As a research analyst, Zach provides valuable insight to the Investment Committee. Zach works side-by-side with FBB’s Director of Research, reviewing existing stock and bond holdings. Zach offers insight on various sectors and individual companies and generates new ideas for potential future investments.

The information provided herein is for illustrative and education purposes only and is not intended to be and does not constitute specific investment advice. We urge you to consult with a qualified advisor before making any investment decisions.
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