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Sep
11
When you buy stock in a company, what do you feel? Anxiety? Excitement? Do you immediately second guess your decision? Or regret it? Let me guess: refresh, refresh, refresh the screen to see if the price has gone up...then check it every chance you get, but no less than daily.
Justin posted this comment about the psychological side of investing:
Joe, I'd like to hear what you think about the psychological side of being an investor, if you run short of ideas. I read a quote the other day that made me laugh. One guy said he could tell he was probably going to make money on an investment if he felt like he was going to throw up when he bought. Now, I'm not in for that extreme. I like a little higher comfort level when I buy, but I think he was referring to staying steady or buying as the price dropped. Anyway, fascinating stuff.
The Psychology of Owning Businesses
When I'm buying stock in a business for the long-term, I feel almost nothing. I know it is a good or great business (it wouldn't get to the valuation stage if it wasn't) and, if I am confident in my valuation because the past has been fairly predictable, I say to myself,
Okay. I know the value. I like the company. Hey, it's at a discount. I'll buy it.
There is no buyer's remorse. In reality, I feel almost nothing. If I'm not 100% confident and comfortable, I don't buy. I know that there are thousands of other companies just waiting to get into my spreadsheet.
Understanding The Timeframe
My research and experience has shown me that, when I buy a business for the long-term, it generally takes 18 to 36 months for its price to reach its intrinsic value. Don't get me wrong: I don't think that 1.5 to 3 years is long term. Still, that is what I have found.
When the prices of my businesses approach or reach their intrinsic values, I decide whether to hold or sell based on the long-term prospects of the business. Some I'll hold; some I'll sell. But that moves us to...
Patience And Psychology
The hardest part of being a silent partner/investor comes in the first few years. People have a naturally tendency to watch the markets and our stock prices, likely because so many people have been so burned for so long that they no longer trust the markets.
Over time, you begin to understand the silent partner concept and begin to see how price and value are correlated. Eventually, it all makes sense. Still, there are phases that (I think) everyone must go through:
This is purely based on my experience, not some well-funded psychological study. Of course, feel free to donate $1 million to me so I can say this was a well-funded study.
The Stages of Silent Partner Psychology
Nervousness/Fear: At this stage, investors tend to doubt their reasoning—especially when the stock price remains flat or drops for weeks or months after buying. Selling now helps perpetuate an endless cycle of market fear and mutual funds.
Fear/Confidence: Assuming you got through stage one, you begin to become confident in your positions as the stock prices creep up towards the business' value. You still have some fear because you are buying other businesses at the same time. Selling here puts you in that "I tried it but it was just like every other system" mode.
Overconfidence: "I'm the greatest investor in the world!" You begin to see how price tends to follow value. At this point, you begin to disregard the business and slap values on every stock out there. Oops—losses ensue because it is too difficult to value businesses when the future of the business is highly uncertain. This system stinks.
Serenity: You review your mistakes and see where you went wrong. All of the sudden, it all makes sense. You go back to Fear/Confidence, and then finally graduate to Serenity (skipping Overconfidence this time). You no longer worry about the markets because there is no stock market.
Can You Speed Up The Process?
The best way to understand and go through the psychology is to run a business for two or three years (or more). That may not be entirely possible for everyone. Buffett has said,
I am a better investor because I am a businessman, and a better businessman because I am an investor.
His mentor, Benjamin Graham, said,
Investment is most intelligent when it is most businesslike.
I say,
Until I ran my own company for a few years—until I had to come up with the cash when times were tough and until I could enjoy the cash when times were good—gambling and investing were synonymous. Today, they are on opposite sides of the world.
And when you understand and visualize that, either through time investing or time running a business, you will find peace in your portfolio.
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by Lethe on September 16, 2007 at 9:05 PM