Some investors have made life-changing amounts of money in the stock market. Unfortunately, these investors are in the minority.
Research shows that the vast majority of individual investors barely break-even in the long-term, after including the impact of inflation on returns.
Similar research has also shined some light on why this is the case. As it turns out, investors struggle not because they don’t pick the right stocks, but because they don’t wait long enough.
To put it another way, many investors are not patient enough, and that’s why patience is one of the most valuable skills any investor can acquire.
Warren Buffett once noted that investors only need to find a handful of good ideas in their life to be successful. I would take this one step further.
Most investors only need one good idea in their life; buying a low-cost index tracker fund.
Indeed, an investor who was savvy enough to put $100,000 into an S&P 500 tracker fund in 1990, would be sitting on a financial nest-egg worth $1.73 million today. If the same investor had added $1,000 a month, they would have nearly $4 million today.
Simply put, finding good investment is not the hard part. Sitting on good investments is the biggest challenge. This is especially true when it comes to growth stocks.
Peter Lynch, who is considered to be one of the greatest investors of all time, outlined this problem in an article in 1994. He highlighted the case of Charles Silk, an investor who’d stumbled across a 150-bagger stock:
“Call Charlie a lucky man for stumbling onto Cook Data Services, but luck didn’t make him a millionaire. The hard part was holding on to the stock long enough to get the full benefit. After the price had doubled and then tripled, he didn’t say to himself, I’ll take my profits and run, like many investors who invent arbitrary rules for when to sell. He wasn’t scared out when the price dropped, as it did several times, and he ignored the highly publicized negative comments made by forecasters and “experts” who knew less about Blockbuster than he did. He had the discipline to hold on as long as the fundamentals of the company were favorable. It was not a guess on his part. He was doing his homework all along.”
Lynch went on to explain that it took eight years for Cook Data Services to become a 150-bagger.
Eight years might seem like a long time, but viewed from the amount of money earned per year, it looks much more reasonable.
For example, Cook Data Services would have turned an investment of $10,000 into $1.5 million in eight years, which works out at $187,500 a year.
This one simple example shows why it’s essential to take a long-term view when investing. The real money is made over many years, not overnight. How many of the world’s wealthiest investors are day traders and speculators? The answer is zero.
It can take many years for an investment to mature, as Lynch summarised in his article:
“In my investing career, the best gains usually have come in the third or fourth year, not in the third or fourth week or the third or fourth month.”