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If I were to ask 100 investors what they think are indispensable attributes of great investors, I’d surmise that “intelligence,” “shrewdness,” “ingenuity,” “foresight” would top the list.
I’d also surmise that “patience” wouldn’t crack the top 10. Yet if there is another attribute more vital to ensuring investing gains over the long haul, I’d struggle to conjure one.
To be sure, successful investors are hardly dullards, dolts, or dingbats. An appreciable level of intelligence is required to achieve investing success. For that matter, an appreciable level of intelligence is required to achieve any success.
But impatience can chronically sabotage the best laid plans, no matter how intelligently designed. Impatience manifests in intractable habits – nearly all bad.
Take excessive trading. Academics have overwhelming shown excessive trading undermines investment performance.
In one illuminating study titled “The Behavior of Individual Investors,” professors Brad M. Barber and Terrence Odean compiled trading behavior of 65,000 individual investors from 1991 through 1996. They found that investors who traded most frequently earned 7% less than those who traded least frequently net of all costs.
I’m hardly surprised. Impatience draws investors into the frenzy of performance chasing, and its corollary – trading in and out of hot stocks. It’s a losers game for the vast majority of investors. And should the rare investor fail to rack up actual trading loses, he’ll rack up a higher tax liability. Short-term gains are taxed at the marginal income tax rate; long-term gains are taxed at the capital-gains rate. Over time, the higher marginal tax rate erodes performance.
But there is something even more subtle and more insidious imbedded in impatience: It disables the miracle of compounding.
Consider the wealth-generating and time-intensive strategy of dividend-growth investing. To maximize dividend growth’s potential an investor must budget large blocks of time. Dividend-growth investing isn’t a market-timing strategy; it’s a buy-and-hold strategy – one measured in years, if not decades.
The good news is that patience is so very frequently rewarded. If you have the patience to commit to dividend-growth investing, your patience will be rewarded with superior returns and wealth creation.
High Yield Wealth recommendation McDonald’s (NYSE: MCD) demonstrates proves my theory.
McDonald’s is a prodigious dividend grower. The company has raised its dividend every year since 1976. If you’re a patient investor, you’d have achieved investing success, regardless of the timing of your purchase.
For example, you could have bought McDonald’s for around $28 in 2004. That year, you’d have collected $0.55 in annual dividends per share. That’s an unspectacular 2% yield.
But fast forward to 2013. McDonald’s pays $3.24 in annual dividends per share. That $28 initial per-share investment now yields 11.6%. What’s more, that $28 per-share initial investment has appreciated to $96. The patient investor would have also collected over $18 in per-share dividends during his holding period.
Of course, McDonald’s hasn’t been a linear shot up. Patient investors would have to endure market panics, price stagnation, and analyst downgrades. But staying in the game paid off.
Best of all, McDonald’s isn’t the exception; it’s the rule. You’ll find the same wealth-compounding effect in other dividend-growth stocks: ExxonMobil (NYSE: XOM), Altria (NYSE: MO), Johnson & Johnson (NYSE: JNJ). The list goes on and on. The key is to stay invested, and stay invested for years.
So if you’re an impatient sort in need of a resolution for the new year, you’d be hard pressed to find one better than to resolve to cultivate a little patience.
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