Q&A: What’s the tipping point between disciplined patience and taking action?

Each month, we break down topics

related to value investing.

Have a question? Reach out to us.

If the psychological aspect of investing is the hardest, how do you know when you've hit the tipping point where a patience mindset needs to give way to a flexible mindset? Where you're willing to acknowledge the loss, and make changes?

Being right requires patience because the market doesn't reward correct decision-making overnight. When I think of patience, it's more about, "Don't try to extract more from the market than it's willing to give."

Think of it this way: if you look at it on a market level, the odds that prices will increase go up the longer the term you look at. A study of the S&P 500 over nearly a century found the following:

2: https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html

In other words, in more than 90% of all rolling 10-year periods, the market's been up. People have to understand that, and that’s why patience means you don't pay so much attention to the short-term day in and day out or week in and week out changes.

But sometimes, as discussed above, the underlying facts around the investment change. So, the tipping point requires more than just ordinary day-to-day fluctuations. Something has to be happening on a deep level with the business itself. And yes, there are times when you reach a point where you have to think hard about an investment you’ve made.

The question here is what is the best decision based on the facts of today? Not based on the facts a year ago or two years ago. What should you do right now, based on what you know about this company? The worst thing that you can do is anchor on your original decision.

The truth is the idea of patience or discipline in an investment isn’t in tension with being flexible enough to make changes when changes are justified. A good investor is always paying attention and re-evaluating as needed. So, patience doesn’t mean you close your eyes and always wait it out. It just means that you respond to meaningful changes only, not short-term fluctuations. You don't change unless there's a truly substantive change in the underlying business itself.