The Business of Value Investing.pdf

Practicing the Art of Patience 159

many investors begin to accelerate the investment making process,

often at the expense of sound analytical judgment. When we make

bad decisions, we have no one to blame but ourselves.

The ease and speed with which investors can trade stocks,

and the barrage of market data now available to us, certainly don ’ t

help. The ability to get in and out of investments at the click of a but-

ton feeds the speculative urges of market participants. Many of the

market’s benefi cial attributes often can be the source of the most

detriment to the investor. Let ’ s examine some of those attributes now.

Ups and Downs of Market Liquidity

The same liquidity that provides many of the stock market ’ s advan-

tages can also produce the most severe consequences. I ’ d argue that

less liquid investments are better for investors ’ well - being, providing

fewer opportunities for them to make impulsive and costly buy or

sell decisions. Liquidity is a very important function of our equity

markets. Faced with unexpected fi nancial needs, the ability to eas-

ily turn your securities into cash is a comforting option. Then again,

given the unpredictable short - term volatility of stocks, a fair assump-

tion is made that prior to investing in stocks, you have allocated away

some funds for emergency purposes in the bank. This assumption

further eliminates the need to engage in short - term oriented specu-

lative activities in order to make money. One of the basic tenets of

prudent capital allocation is that money allocated for the participa-

tion in equity investments should have a multiyear horizon, ideally at

least 10 years. Yet many investors plunge into the stock market with

unrealistic, if not foolish, expectations of overnight wealth creation.

The technology mania of the late 1990s solidifi ed this false belief

that stocks could make you rich overnight. For a lucky few, they did

become rich overnight. Tragically, investors saw this market as the

new era of investing. You couldn ’ t afford not to be in the stock mar-

ket, not when the auto mechanic was earning triple - digit returns

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