Warren Buffett is widely recognized as one of the best, if not the best, stock market investors of all time. He founded his holding company, Berkshire Hathaway, 50 years ago. Berkshire Hathaway invests in companies Buffett deems as being undervalued. During the 50 year span, Berkshire Hathaway’s results have been nothing short of spectacular: its shareholders have enjoyed an average annual rate of return of 21%.
When Buffett was a mere 12 years old, he made his first ever stock trade. It shouldn’t come as a surprise that Buffett utilized value investing, which encourages an investor to purchase underpriced stocks, to make that trade. He purchased 6 shares at a price of $38 per share.
Buffett was supremely confident that he would profit from the trade (which 12 year old wouldn’t be?) In fact, he was so confident that when the price of the stock fell 30% over the next few months, Buffett refused to sell. He strongly felt that the stock was under-priced, and would wait patiently until the price rose.
Finally, after a few more months, the price indeed began to rise. When it reached $40 per share, Buffett sold his shares and pocketed $12 in profits. But just when it looked like things could not have been better, a young Buffett saw the price of the stock shoot up. Within weeks, it reached $200 per share.
Buffett was devastated. Later on, he would go on to say that this trade taught him one of the most important traits an investor must have: patience.
Why is Patience Difficult to Master?
Imagine putting yourself in Buffett’s shoes at the age of 12. You can understand how enticing it would have been to sell the stock at $40 and earn a small profit. After all, the purpose of any trade is to earn a profit. When the price of the stock falls 30% (over several months) and slowly climbs up, your natural instinct is to exit the trade as soon as it is profitable.
But if you dig a little deeper, you begin to understand how our instincts can be misleading. Buffett made the decision to purchase the stock because he felt that it was significantly under-priced. In other words, he felt that the price of the stock should be much higher than $38.
When should you sell your shares? Using the same principle, you would sell the stock when the price has corrected itself and the stock’s price has gone up considerably. The only obstacle getting in the way between what you should do and what you do is attributable to a lack of patience.
There’s a famous saying, “hindsight is always 20/20”, that highlights how difficult it can be to stay in a trade when our emotions ask us to exit. When you find yourself in this situation, ask yourself why you’re looking to exit the trade. Is it to earn a profit, despite knowing that by staying patient, you can book a much higher profit? If that’s the case, stay in the trade. Stay patient, and only exit the trade when you have an objective, non emotional reason to exit the trade.
Patience is never easy to master, and Warren Buffett learned this lesson the hard way at a very young age. But it’s never too late to learn from your mistakes, no matter how old you are.