As a continuation of last month’s essay of the first of three temperamental qualities - Mindset, we move now to the second principle of long-term wealth accumulation.  Patience. I know no better way to explain this concept than with a story – a true story.  This comes from the book by Professor Jeremy Siegel of the Wharton School of Finance, titled – Stocks for the Long Run, 6^th Edition.

In the summer of 1929, a Senior Finance Executive from GM was being interviewed about how the typical individual could build wealth by investing in the equity market.  Later that year it was published with the title of, “Everyone Ought to Be Rich” (it’s amazing how journalism has not changed in its sensationalizing of headlines…sorry, back to the story).

In the interview, the GM exec was explaining how America was on the verge of an enormous industrial expansion. So, by placing just $15 per month into good common stocks (the market), investors could expect it to grow to over $80,000 in the next twenty years.  This equated to a return of 24% per year - A lofting assumption in any market.

Seven weeks later the market crashed.  Over the next 32 months, the market seen its worst decline in US history – an 89% drop from the peak.  The Great Depression had arrived. The GM Exec’s advice was ridiculed for years to come.

You may be telling yourself, “Great story, Lou, but this doesn’t make me feal ANY better - actually, it makes me more uneasy.” 

But wait, I’m not finished.  If you calculate the value of the portfolio of someone who had the patience (this person would be crowned the King of patience) to follow his advice in 1929 – you would find some interesting results:

1. It outperformed someone who bought Treasury Bills after just 4 years.
2. Twenty years later, by 1949, its return was 7.86% per year. More than double the return on Bonds.
3. After 30-Years, its return was 12.72% per year. Nowhere near his initial projection, but eight times higher than bonds and nine times higher than treasury bills.

The story of John Raskob’s (the GM guy) infamous prediction illustrates an important concept, with this quote by Jeremy Seigel, “Bull Markets and Bear Markets lead to sensational stories of incredible gains and devasting losses.  Yet patient (emphasis added) stock investors who can see past the scary headlines have always outperformed those who flee to bonds or other investments.”  This has been the case going back to as far as 1802 – as the facts of history have shown.

Furthermore, how much patience has been required to recover from these historical pullbacks in the markets? Brace yourself for lots of numbers…

• If you invested at the peak (yes, the day before it began its drop) of the market in 1929 – It took 15 years to recover.
• Since the end of WWII – the longest time to recover your original investment has been just over 5 years. This was from August 2000 – April 2006 (the dot com bubble).

Not to pile on, but while we are here.  If curious of the annual returns from 1802 - 2021 (yes, eighteen hundred and two) of each asset class, here they are AFTER INFLATION:

• Stocks:               6.9%
• Bonds:               3.6%
• Treasury Bills:    2.5%
• Gold:                  0.6%
• US Dollar:         -1.4%

As a sidenote, I’m not trying to forecast or predict anything from this historical data.  Why? As I’ve said many times – there is no statistical evidence for the persistence of performance. If we are all honest, we can’t predict if the sun will rise tomorrow or if we’ll be around to witness it.   As your financial planners, we don’t forecast – we plan and prepare for all probable outcomes.  That’s how planning is done.

Unfortunately, we have evolved into a 24/7 media driven world.  As a result, we are bombarded - daily - by the noise of some talking head or self-proclaimed expert prodding us to do something NOW.  Why? They say that you deserve it NOW.  This is how our current culture is advised. 

Inasmuch, Warren Buffett once said about investing and patience – “Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.”

As history has shown – we will continue to advise you on the facts and the highest of probabilities (and maybe a little sarcasm).  While the conversation you’ve heard and will hear again from our firm is – “If your goals haven’t changed, don’t change your plan and if your plan hasn’t changed, don’t change your portfolio.  Allow the planning process to work.”  This is as countercultural as it gets, which requires a heavy dose of the second of the three temperamental behavioral qualities – Patience.

Sources: Jeremy Seigel – Stocks for the Long Run, 6^th Edition