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Why Patience Matters

Recognize the difference between patience and denial.

Patience is an important virtue for investors. Just about everybody can agree on that. But many advisers and financial writers seem to think that practicing patience is a snap and that we should all do it all the time, even if our instincts and emotions tell us otherwise. Just eat your spinach -- it's good for you, they seem to say. Yeah, right.

The sin of denial

I won't give you 19 recipes for spinach, but I do want to discuss how you can tell the difference between patience -- a wonderful, Buffett-esque quality -- and denial, a sin that afflicts almost every amateur investor.

First, a story. In August 2003, I bought Ambassadors International (symbol AMIE) at $11. The company had almost $9 per share in cash, a marginally profitable travel business and the management talents of chairman Peter Ueberroth and his son, Joe, the president and chief executive officer. Fairly quickly, the stock rose to $13.50. I smiled.

And then it more or less stayed there for two years -- in a rising market. I stopped smiling. Each time I analyzed my portfolio, I looked at the laggards and my eye rested on AMIE. "You slug, you loser, you poor excuse for dog food," I wanted to yell at it. I thought of selling AMIE about 97 times. Watching this stock was a kind of investing hell. It was like staring at paint that never dried.


But I didn't sell because my reason for buying remained intact. The company still had a ton of cash, and I still had reason to believe that its executives would deploy it wisely. In December 2005, AMIE announced that it would purchase a cruise company. The stock popped. This April, it bought another cruise company. The stock popped again. From December 2005 to May 2006, the stock doubled. I'm again thinking of selling. But the Ueberroths still have loads of cash, so I probably won't.

The point is not that I got this one right. The point is that it was torture to hang on to a stock that didn't move for two years. But the outcome validates something Peter Lynch used to say. He noted that many of his best stocks made their biggest moves in the third year of ownership. Investors who demand instant gratification would have missed those price spikes.

So what should you do? Know yourself. Are you patient, or do you have a toddler-like inability to wait for treats? The answer is crucial. Value investors need to be patient. Otherwise, you will routinely sell too soon.

I have a friend who often buys stocks I recommend to him. But he typically bails out before I tell him to sell. "Why did you sell?" I'll ask. His answers vary, but they can be summed up this way: He got twitchy. He simply feels he has to do something.


Giving in to this urge can be fatal to a value player, who, by definition, invests in flawed companies. But the share price already reflects a lot of the bad news, so someone who panics and sells when more bad news arrives may not be thinking clearly. So when does a patient investor sell? And when does a reluctance to sell turn into a pathological refusal to acknowledge reality?

When to sell

If your initial reason for owning a stock is still valid, you should probably hold on. If the original reason no longer makes sense -- you thought, say, that Java Joe's would whup Starbucks -- sell, regardless of the price.

And keep ego out of the decision. The vast majority of individuals hate to sell at a loss. I've seen dozens of portfolios (many belonging to clients who came to me for help) and, without exception, they were filled with dogs that should have been sold years earlier. So are my clients pillars of patience? No. They were all in denial.

Good ideas may take three years to blossom, but they don't take forever.

Columnist Andrew Feinberg writes about the choices, challenges and frustrations facing individual investors. Read his blog, The Money Monster, five days a week at