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The Power Of Patience

Patience is the rarest commodity on Wall Street. That's why it's so well rewarded.

With all the volatility in the stock market, it's easy to understand why investors don't have much patience. They buy a stock and watch it slowly, very slowly, inch its way higher. Then one negative earnings report comes out or bad news hits the market, and all gains go away, disappearing in a matter of minutes. The feeling is like watching a balloon slowly inflate, then getting hit by a pin. POP! Gains become losses, and the world looks less fun.

What investors have to keep in mind, so they can keep it when their stocks go pop, is that there are two elements to owning stocks: one is the company itself; the other is the stock market. When you buy a stock, you own part of a company. Like most companies, it will take a long time to add value and grow. You wouldn't buy the corner grocery store and expect it to be worth more tomorrow unless you discover gold under it. Owning a company requires patience to watch management create more value over time. When and if management delivers, you will be rewarded. If management doesn't, then you suffer. But it takes time to determine that, and maybe some management changes. The stock in a company will reflect good and bad events as they unfold, many times in more dramatic fashion than is warranted but over time, the stock will reflect the value of the company.

The other part of owning stocks, the stock market, moves from its own causes, separate from the company. The fact that a major oil spill hits a section of the economy has nothing to do with medical devices, but if investors fear the worst, then they'll sell whatever is in thier portfolios. Don't confuse them with the facts. They want out. So they sell. Doesn't matter what the stock is, what it does, or the potential it has. Fear comes in the room, and reason flies out the window.

Smart investors love these irrational moments. It gives them opportunities that normally wouldn't occur. They know the difference between a meaningful event for a company and one that won't affect earnings. They buy when others are selling, then patiently wait for more rational thinking to prevail. It always does.

A stock that required great patience but was hugely rewarding is Apple (AAPL). The company was in a real bind back in the late 80's and early 90's. The stock was bumping along. Steve Jobs was gone. They hired a Pepsi Cola manager to run a once thriving tech company. Strangely enough, that didn't work. Steve Jobs returned. Over time, iPhones, Macs, iTunes, iPads happened. The rest is history.

Patient investors were rewarded. But the journey wasn't easy. There were many years when the company didn't deliver. For a while, the wrong management ran the company. When that changed, so did the stock price, for the better.

There are many more examples of stocks that investors sat on patiently only to watch the company fail (GM, Washington Mutual, Indy Mac come immediately to mind) or teeter on the brink of bankruptcy for years. They never came back. These are the investments that investors need to eliminate when its obvious the company won't make it, no matter how painful the hit. Taking the remaining money and buying even a few shares of a success story will quickly erase the pain. It may take years to recoup the loss but at least your money has a chance of being successful. Hanging on to a sure loser doesn't help your health or your wealth.

It's tempting to take some quick profits in today's market. The chances of a quick pullback in the market or in a specific stock are great. Investors are jittery, nervous about the economy, their jobs, their homes. Survival is the priority. But if you own a stock that has performed well over the years, especially over the last 3 years when the economy took a nose dive, then most likely that stock will be one of the really big winners when customers come out of their shells and start spending. The best stocks of the last years should continue to outperform as their earnings will most likely increase faster when the economy is strong. Patience is rewarded in the stock market. It's the rarest commodity.

- Ted Allrich

October 19, 2010

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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