What is THE most important aspect of investing?

It’s not the ability to read a balance sheet. Nor is it recognizing trading patterns. In fact, this particular quality isn’t even specific to investing; it’s essential to any skill.

I’m talking about patience.

From an action standpoint, investing is boring. Unless you’re a day trader, it’s very much a waiting game. After all, buying or selling an investment requires nothing more than a click of the mouse. A couple seconds and you’re done. The rest of the time (99%) you’re doing nothing.

Well, not quite nothing; you’re actually patiently ignoring information.

Every day investors are bombarded with information about the financial markets. Whether it’s the TV, internet, newspaper, or even radio, multiple media outlets spew forth theories and updates about what’s happening every second of every day.

Almost all of this is pure noise. Financial journalists make their living reporting on events. Sometimes this entails making events appear significant… when they’re not. Or even worse, sometimes they get the entire story wrong—like the recent braying that inflation is under control because oil fell from $145 to $115.

Don’t get me wrong. I am not trying to put down journalists. Many of them do a terrific job of reporting on intricate developments in a timely manner. But sometimes writing a story involves creating a narrative based on events that aren’t statistically significant. I’m talking about explaining why the market moved a quarter of a percent, for example.

Your best bet, as an investor, is to ignore 90% of everything you hear about financial markets. It sounds very simple. But it is not. We as humans are not designed to sit still. We want to be doing something, not sitting around waiting for our money to appreciate. In actuality, waiting takes tremendous discipline.

Look at financials stocks for instance.

I first suggested shorting financials to readers of my advisory service International Wealth Advisory in late January 2008. We bought the UltraShort Financials Proshares (SKF) an inverse fund that returns 2X the inverse of the Financials ETF. Thus if the Financials ETF fell 5%, SKF rose 10%. If the Financials ETF fell 20%, SKF rose 40%. And so on.

Thanks to the worsening credit crisis and slew of write-downs we were up nearly 30% on the position in a little over a month. Then the Bear Stearns deal happened. As you probably recall, what followed was a two-month rally lead by financials stocks. One after another the Wall Street CEOs came forward announcing that the “worst is over.” Financials stocks rose 20%. But did we sell and panic?

Nope.

The Bear Stearns deal didn’t change anything about the state of financials’ balance sheets. It didn’t magically create capital to cover losses. And it certainly didn’t improve credit conditions for Wall Street banks. All it did was move a bunch of mortgage-backed junk on the Federal Reserve’s balance sheet. The rally that followed was driven entirely by sentiment, not an actual improvement in the fundamentals for financial stocks.

So we held on.

Come May, investors began to discover the truth, that Wall Street CEO’s claims “the worst was over” were a load of bunk. One by one financial firms began announcing larger write-downs and missing earnings estimates. Everyone from AIG to American Express reported dismal results. And financial stocks tanked.

We ended up closing out our position for a 51% gain in mid-July. Being patient nearly doubled our return—our original gain, if you’ll recall, was 30% in February. By focusing on fundamentals, ignoring the hype, and keeping our wits about us, we pocketed a beautiful gain.

And we did it by doing nothing but being patient.

Last 5 posts by Graham Summers

• The Most Private Bank in the World - November 17th, 2008
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