The phrase, which has been around in English since about 1545 is, “Rome wasn’t built in a day.” It’s important for investors to take it to heart because essentially it’s a warning against rashness and impatience — which can be, as behavioural economists — and history — keep reminding us, an investor’s worst enemy.
When we react — or over-react — to short-term performance and behave impetuously, we often do it at the expense of our long-term results. On the other hand, those investors who appreciate and capitalize on the difference between the market price of a business and its intrinsic value, those investors who are patient, those investors who don’t panic tend to win in the end.
This is nothing new, history proves it to us, time and again. And it’s a subject Warren Buffett wrote about, in 1984, in Hermes, the Columbia Business School magazine. In his article, “The Superinvestors of Graham-and-Doddsville,” he tracked the records of seven successful investment managers, including himself. Aside from Buffett, the six others — all extraordinary managers with exceptional long-term track records, generally underperformed in 30-40 percent of the years covered.
In 1987, V. Eugene Shahan, a 1960 Columbia University Business School alumnus and vice president and portfolio manager at the U.S. Trust Company, wrote a follow-up article, “Are Short-Term Performance and Value Investing Mutually Exclusive? The Hare and the Tortoise Revisited.”
After admitting that he “assumed that none of those money managers panicked in the face of adversity and changed his style after three disappointing years of using a value approach,” Shahan asked an interesting and provocative question: “How many investors have the strength of character to continue an approach that can be unrewarding for three or even five years?”
A more important question, at least to me is, are you one of them?
Alan Friedman is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Alan Friedman do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc. a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.