EC From The Impatient To The Patient

“The stock market is a device which transfers money from the impatient to the patient.” - Warren Buffett

As we enter 2021, it appears that Buffett had things upside down in 2020. The things which had gone up the most by the end of 2019, went up the most in 2020. We invest on behalf of clients who want to avoid stock market failure and history shows most investors are impatient and are like a car stalled on the railroad tracks. A picture of the most impatient investors/option traders tells the story:

(Click on image to enlarge)

Fortunately, it is for these critical junctures in the stock market which disciplines like ours were created. First, we believe valuation matters dearly. It didn’t matter in 2020, in fact, you were better off to buy the most expensive securities carrying the highest possible risk during the year. Historically, valuation is a driver of alpha and usually makes a roaring comeback when a “frenzy” (like Charlie Munger describes today’s stock market) breaks and shifts the capital to those who are patient.

Second, we want to own companies for a long time. Our average holding period is about six years. This keeps trading costs down, capital gains taxes low, and causes us to ride winners to a fault. Peter Lynch always talked about ten-baggers, stocks which go up ten times what you paid for them. He argued that you were the most likely to stay with a company that had something about them which stopped the shares from getting wildly popular and into impatient hands. His favorites were Phillip Morris and Fannie Mae, one a vilified tobacco company and the other a misunderstood financial firm. We own some disrespected winners like eBay (EBAY), Amgen (AMGN), Bank of America (BAC), and Lennar (LEN), which fit that criteria.

Since 2011, when they started their dividend at 28 cents per quarter, Amgen (AMGN) has gone up from $52 per share to around $226 on December 31, 2020. Their dividend for next year is declared at $1.76 per quarter or $7.04 per share per year. This means a buyer at the time of the original dividend announcement at around $52 per share is getting close to a 14% cash on cash payout from dividends ten years later. From all you retirees out there, can we get an Amen? Did we mention that Amgen is trading for an incredibly reasonable 2021 estimated price-to-earnings ratio (P/E) of around 13 and has never been this cheap relative to the S&P 500 Index’s forward P/E the entire time we’ve owned it?

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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William K. 2 weeks ago Member's comment

I love that Carlie Munger quote!

The rest of the article is very interesting and educational, although I am not sure what effect it has on me,.