The Rich Rewards of Patience

 | Oct 23, 2012 | 1:30 PM EDT
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As much as we all wish we could make big money quick in the stock market, that is not how it goes for 99% of market participants. Thankfully, most of us invest because we are motivated by the idea of reaping big gains over many years. But, sad to say, many investors come to find out that even after years of investing, the returns just aren't there. While no two investors are alike, human behavior tends to be consistent and most humans, for better or worse, are impatient creatures -- and, tragically, impatience is the enemy of the stock-market investor. When emotions are running high, investors "zig" when they should "zag."

It's been often said that investing is easy to do but not simple to do. What this means is that anyone can buy and sell stocks -- that's the easy part. The not-so-simple part is in understanding the business, knowing what value you are getting for the price paid -- and, most important, keeping your emotions in check. Make no mistake, being a patient investor is not a rallying cry for buy-and-hold investing. There are a lot of flaws in the concept of buy-and-hold. If a company deteriorates, it should be sold, not held. But that's a decision made for rational reasons, as opposed to emotional ones. On the other hand, when a great business suffers a 10% share decline because it missed earnings-per-share estimates by a penny, that's emotion at work. Instead of following the crowd, a shrewd investor should act independently.

One of the first stocks I ever mentioned on Real Money several years ago was energy master limited partnership Linn Energy (LINE). At the time, Linn was trading for around $15 a share and yielding more than 15%. The high yield was the market's way of expressing uncertainty about Linn's future. All one needed to do was spend a couple of hours studying Linn's business model to see that the company was mispriced. The company had most of its production hedged at prices that would guarantee cash flows, and thus the yield. A little over a year later, shares were trading in the high $20s. Today, shares trade for $41 and yield 7%, and in general investors are now being told about the high quality yields of MLPs.

Patience will similarly pay with financials today. At the very beginning of this year, I said Bank of America (BAC) was my top pick, and it wasn't because I had deemed myself a market forecaster or had thought I was smarter than most. My basis was that BofA shares had dropped by 50% in 2011 and had started the year off trading at less than one-third of tangible book value. Along the way, the bank was deleveraging its balance sheet, shedding risky assets and improving its capital ratios. I wasn't touting BofA only for 2012, either, but for a multiyear period.

Shares are now up by more than 50% this year despite the continued negative buzz that financials are getting. It seems Mr. Market is telling you one thing but doing something completely different. Despite the run-up in financials in 2012, there is still some upside left for the patient investor. Of course, owning financials would cause impatient investors to want to pull their hair out.

Some other interesting stocks continue to get sold off and offer interesting possibilities to those with a little patience. Carl Icahn's Federal Mogul (FDML) may be one to watch. Down from $19, shares are now trading for $7.50. The recent earnings report was not good: The firm reported a loss and revenue came in below expectations. A market capitalization of $744 million, along with $3 billion in debt, doesn't help Federal's cause. But Federal's business, the sale of auto parts, is not a bad one -- and Icahn is a creative investor. Shares trade at a discount to book value, and if Mr. Market continues slashing shares, Icahn could step in and take the company private.

We are stepping into an interesting year-end for U.S. stocks. The market has rallied strongly, earnings are lackluster, and Election Day is around the quarter. A little more volatility could start creeping into the market as the year-end approaches. Exercising a little patience to wait for better prices, and investing when the price is right, will likely again create a favorable result.



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