Why patience in investing is crucial?

TikTok, Instagram, and Reddit are sources of some of the worst financial advice, but what is most concerning is that it influences people to expect abnormal returns in record times. YOLO investing and going “all in” on one speculation produces instant zeroes, but people are still lured in by screenshots from people posting going from $100 to $100,000 in a matter of weeks. To be fair, enough people post going from $100,000 to $0 in days, yet the possibility of getting rich quickly is so damn alluring. So why are we saying that patience in investing is the most crucial thing?

Investing and time

Money is constantly flowing between assets in search of the best return. When stocks are performing, we see more flows into stocks, when bonds perform, into bonds, when economies collapse, into alternative assets, and so on. 

But one strategy that will always stand the test of time is owning a solid operating and cash-generating asset. No matter what the economy is doing, owning these assets will build wealth over a long period. The asset can be in the form of your own business, an online business, a stock and bond portfolio, a real estate portfolio, or better yet, a combination of all of these. 

Okay, but why does it have to take a long time?

Value takes time to find and build

We are value investors who love to buy and hold good assets at a reasonable price that grow over time. In our opinion, it is the only proven way to build wealth sustainably. However, this strategy doesn’t generate quick results. 

Here is why.

Value from investing in businesses comes when either good companies fall out of favor with the markets or businesses are still small; thus, we can get them at a discount to their potential future.

Finding undiscovered stocks.

When a company stock falls out of favor, there is probably a reason. Momentum, emotions, industry developments will drive people out of certain businesses and into others. Almost by definition, that means that these stocks that show low interest will likely not perform well in the near future. The goal is to find undiscovered stocks that people haven’t noticed yet or businesses that have fallen out of favor for the wrong reason. 

We wait, and once the market picks up on them, their price goes up to meet their accurate valuations. 

This is precisely how fortunes are made. It is how Warren Buffett, Seth Klarman, Peter Lynch, and many other famous value investors made their fortunes. 

Finding small companies with growth potential.

Companies of all sizes fall out of favor for various reasons. But some companies haven’t made it yet, and we have a chance to invest in them before they grow. These would be small to mid-cap companies. Some will even be penny stocks. In fact, small-cap stocks have performed very well historically, even if we look at a basket of them with ETFs.

Here is a comparison of small-cap ETF VBR vs. Total Stock Market ETF, VTI.

VTI vs. VBR performance

However, keep in mind that just because these companies are small doesn’t mean they are necessarily better investments. We must do our due diligence. But one thing is a fact doubling, tripling, or quadrupling profits is much easier for a small company than a big business. 

It will take time for the market to uncover and uncovered great business, and it will take time for a small but great company to grow. Patience in investing in these companies will be why we will see a positive return in the long run and avoid flip-flopping and making unnecessary mistakes in the short run.

In the short term, these stocks will fluctuate because greed and fear will drive their prices. In the long run, fundamentals will prevail. They always do.

Online businesses will take time to grow.

Let’s shift our focus to investing in online businesses. To see returns from an online business investment also will take time. The reason is that growing web traffic takes time. 

Unless you purchase traffic through advertising, if you want to grow traffic organically, it will take time. Every new content or post that you add will likely not rank in Google in the first year.  Here are some stats from Ahrefs.

How long does it take to rank on Google?

Many pages will not make it at all, but some will, and after a year, they might start generating traffic consistently. In the industry, it is known as the “hockey stick effect.” We see no growth in traffic until all of a sudden it shoots up.

Patience in investing in real estate

Real estate is also no exception to the rule. Patience will also be rewarded whether you invest through REITs or purchase a rental property.

The primary wealth-building vehicle in real estate is a loan paydown. If you own a rental property with a mortgage of $3,000 as an example. If the principal portion is $1700, that is how much money you get every month towards paying down your mortgage. Slowly but surely, over many years, your wealth will grow as your mortgage declines. Add to that natural appreciation and forced appreciation through renovation, and you have yourself a serious wealth-building asset. 

It will not happen overnight, however.

Patience is king

No matter the investment, time is on our side. Compounding interest and pure growth of the businesses we put our money into is what makes us wealthier. It is not buying a hot Reddit stock. Although you might get lucky and earn a quick return, it is impossible to sustain over a long period. So although there is nothing wrong with gambling on a hot investment from time to time, we must remember it exactly like that, gambling. We must ask ourselves do we know enough to make an investment decision and are we chasing a quick buck, or will this investment bring us sustainable income and return over the next many years?