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The Science of Hitting
The Science of Hitting
Articles (432) 

'Extreme Patience' One Month at a Time

June 04, 2014 | About:

After a period of steadily rising markets, we’ve reached a bit of a standstill (or at least what can be described as a standstill by comparison to the market's strong results in 2013). Presently, there doesn’t seem to be much to do for the investor: With limited new investments to be found (or in my experience, at least compared to the relative ease in 2011), patience is the order of the day.

But for some, patience is unfathomable: They are all action, all the time. They can’t imagine a week without buying or selling their partial ownership interest in a handful of companies, let alone a month or two. A recent article in the Wall Street Journal captured this obsession with activity – for activity’s sake – perfectly: “Like Mr. Klarman, [David] Abrams is known to be patient to the extreme. He will sit on a static portfolio for months without making a move.” It’s pretty amazing that sitting for a few months without buying or selling is considered extreme…

Let’s take a second to think about what that means: for the sake of this argument, I’m going to assume a portfolio includes five names: Procter & Gamble (PG), PepsiCo (PEP), Coca-Cola (KO), Johnson & Johnson (JNJ) and Berkshire Hathaway (BRK.B); for what it’s worth, I picked those names at random (although you can clearly argue that they have similar attributes).

Here’s the variation in the stock price for those five names year to date — a time period that is likely longer than the “few months” criteria used for “extreme patience” in the WSJ article:


Low, YTD

High, YTD

High / Low





















From five names picked at random, the widest swing from top to bottom year to date was 18 percent. In terms of intrinsic value, I think that’s worth thinking about for a second.

Let’s assume a company generated $100 in FCF last year, and we expect that to increase by 4% per annum over the next decade, at which point the company will be sold for 15X FCF (terminal value); using a 10% discount rate, that company is worth about $1,600 today. What would the growth rate over the next ten years have to be for the present value to increase to $1,888 (assuming terminal still 15X FCF) – 18% higher than the present value at 4% growth? The answer is 6.2% per annum – ahead of the 4% rate of growth, but not in another stratosphere by any means.

Said another way, would you purchase an investment if you believe the stock priced in 4% growth but was likely to grow at a rate of 6% per annum – would that be an adequate margin of safety for investment? Even for this list of names, that’s still too close for comfort in my mind.

You’ve probably taken the hint that I’m quite skeptical when conclusions are drawn upon a seemingly incomprehensible level of specificity; I’m more comfortable with a frame of mind captured in the words of Carveth Read: “It is better to be vaguely right than exactly wrong.”

Warren Buffett (Trades, Portfolio) said something in a recent CNBC interview about the markets as a whole that I think applies to the names from above: “Most of the time stocks have been in a zone of reasonableness over my lifetime. I think they're in the zone of reasonableness now.”

To escape a zone of reasonable, as I attempted to show quantitatively above, requires some pretty sizable moves as viewed from month to month or quarter to quarter. We’ve certainly had those in the past few years, which explains why some of these names are towards the higher end of the zone of reasonableness – but I still do not believe any of the five are approaching the ceiling. While I’m not against trimming at or slightly above current levels, I think those actions must be considered in relation to their “zone of reasonableness.”

The connection between one’s time frame and their thoughts on valuation (where it is reasonable to buy, sell or hold a position) is undeniable: Investors content with owning a business for five or more years aren’t likely to change course due to a 10% move up or down; on the other hand, short-term traders are content to part ways after a 2% move either way (selling either direction). The way individuals think about businesses, and the opportunities and threats that lie ahead, also plays into this picture: What I consider a necessary investment and opportunity to drive long-term shareholder value (think of Tom Russo (Trades, Portfolio)’s “capacity to suffer”) is simultaneously viewed as a threat to next quarter’s EPS by a trader.

The number of market participants that care about the near-term seems quite sizable; those that take the daily vicissitudes in the market with equanimity are a decidedly smaller bunch.

In my view, this time is no different than any other, even though the scenery has changed: The investor that stays focused on businesses with competitive advantages, and that are priced for adequate returns with a sufficient margin of safety, is likely to do well over time. If you can’t find opportunities that fit that bill, then look elsewhere or wait until you can. Distilling that basic concept into a specified investment strategy is something that I’ll leave to the reader.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus.

As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.

Rating: 4.3/5 (7 votes)



Snowballbuilder - 2 years ago    Report SPAM

Hi science great article as usual !

Every investor should look at djco portfolio (or tom russo biggest holding) to understand wath patient and long term orizon really means ( not to mention Fisher's investment in motorola and TI ) .

i m like you one of the rare breed of long term focused investor .

so are boring months for us .... Is for sure better be my partner than my broker !!

"You dont make money buying , you dont make money selling ... You make money by waiting" munger

The Science of Hitting
The Science of Hitting - 2 years ago    Report SPAM

Snowballbuilder: Agree with your thoughts 100% - thanks for the kind words!

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