Patience is More Than a Virtue

Growing up my dad would always break out into song when my sister or I would start to whine. “Have patience, have patience, don’t be in such a hurry….” you might have heard the same song at some point in your life. He would always follow the song with a statement like “patience is a virtue”.

I’m here to tell you that when it comes to wealth, patience is more than just a virtue - it is solid gold.

In my post last week Curiosity Made the Rich Man, I wrote about some people that I have worked with and what made them successful in terms of the accumulation of financial assets. I narrowed down the traits that these clients had in common and I was able to identify two core values: Curiosity and Patience.

As important as curiosity is when it comes to money, patience is either equally important or maybe even more important.

The major finance reason to maintain high levels of patience is because of the cyclical nature of markets. We all know that the business environment has its periods of both boom and bust. But the real question is why does it matter to have patience? Carl Richards from www.thinkingcarl.com describes the need for patience due to the “Behavior Gap”. Check out what Carl has to say about investing:

“During the last few years, you may have noticed that your returns fell short of the returns you kept reading and hearing about in the media. If so, you’re not alone. A fund’s reported return is only part of the picture. The other half, well, it’s not always pretty, and you rarely, if ever, hear it mentioned. Driven by investor behavior, the investor rate of return doesn’t always match a portfolio’s gains or losses.

Let me explain.
Your potential to earn the fund’s published return rate is based on two criteria:
1. You bought AND held the fund for the entire time.
2. You didn’t add or withdraw any money.

Sounds easy, right? The reality? Few people actually invest this way. Instead, investors chase past performance, buying funds too late (after they’ve already peaked) or selling funds too early (before they turn around).”

I love this explanation. Because investors are driven by human emotion they tend to make decisions at precisely the wrong time - hence Carl’s phrase the “Behavior Gap.” Without massive amounts of patience and self control the average person just cannot wait out losses and take advantage of gains.

Have you ever met someone who wanted something so badly that they end up becoming reckless and end up flailing around like a two year old at the grocery store who wants a toy? It’s not very productive is it?

For most of my life I was a long distance endurance swimmer. Endurance sports are different than other sports most people are familiar with, it’s all about technique, efficiency and - yep you guessed it patience.

When you watch a really talented endurance athlete it looks like they are barely trying for most of the race. Think of Sven Kramer from this year’s winter Olympics. This Dutch long track speed skating phenomenon is so efficient that it looks as though he is barely trying while he sets world records.

I can speak from experience that in reality it is all about self control, establishing sustainable pace and finishing strong.

It’s funny how easily sports analogies translate to personal finance, but it is absolutely accurate. Guys, I am here to tell you that the most financially successful people I have worked with did not get there by day trading, winning the lottery or inheritance. These folks made a decision early on to be financially independent, then they set the course and followed the path no matter what was going on around them. Oh and it helped that they were a little curious about the tools that were helping them get there.

Curiosity Made the Rich Man

I often speak at different team meetings all across the city and have even been known to get outside of our state on occasion. Everyone knows that when you start to put together a presentation one of the most important things to do is think about your audience. You really want to tailor your topic to the people who you are engaging. Time after time, I have found the common denominator that almost everyone has when it comes to money.

Most people want to here about wealth and how to build it.

So a couple years ago I started thinking about the people I have worked with and what made them successful. I found that I should really break out success in two ways:

1.) Satisfaction – I have written a few times about this topic in blogs such as Find Satisfaction in Your Means and News Flash: Your Hero Might Let You Down. The main point being that money will only magnify your situation. If you are happy and satisfied in your life with modest means then adding significant wealth will only expand your satisfaction level.

2.) Accumulation of significant financial assets – Wealth is more than just money but for the purpose of this study, looking at financial assets helps to narrow it down.

So I made a list of the people that I have spent time with that embody both of my success criteria. Believe it or not the list is rather short - only about a dozen names or so.

And then I started to think about what else they had in common.

Outside of the obvious factors such as good annual income, effective savings habits, a little luck etc. I really came down to 2 commonalities that these individuals shared.

Curiosity & Patience

Let’s start by looking at curiosity. When talking about investing Warren Buffet once said “We try to stick with businesses we believe we understand.” I’m sure most of you have heard that quote, but how many of us truly take it to heart when thinking about our own personal investing? Mutual funds, ETF’s, index funds, stocks, bonds and everything in between – there is a lot to get lost in. The few that made my list have a natural curiosity that makes them very dangerous. These folks are constantly asking for more information. They invest in their own companies because they believe in their own abilities and they understand the business their in. They make investments in their education because they believe they can generate more return with more knowledge. They buy ownership in other companies because they understand how they make money and can project future value. And maybe most importantly, when they do not understand something they are not afraid to ask for explanation.

I recently heard a very tenured asset manager from a major local investment firm, speak to a group of financial professionals. One of his quotes especially struck me. He said, “You can either humble yourself now and take the time to ask questions or you can be humbled later when you fail.” That’s pretty blunt but extremely powerful if you are willing to listen.

More on Patience later….

CPA or Software

People look at me funny when I say that this is my favorite time of year. I love tax time. It’s true, I am a nerd - I think my love for it has to do with the planning piece. That‘s neither here nor there. During this time of year, many people ask me which I think is better, tax software bought off the shelf or a professional CPA.

I have to disclose my bias here, I am an accountant by training and most of my college buddies are practicing in firms across the city. However, I do see value on the other side of the fence as well. Let me break it down for you.

Software

I must say, the idea to create tax software was one of the better uses of technology over the past 20 years. What did we do before the question and answer personal income tax format!? At the formation of our tax code, the income tax system and the 1040 specifically, was intended to be simple enough for an 8th grader to complete. Whether or not the government succeeded at that level is… debatable. Truth be told, the software out there is a fine solution for those of you who have a relatively straight forward tax situation. Even if you had a scenario such as the first time home buyer credit take place last year, the software is robust enough to easily guide you through the maze. Most software now even offer a storage function that saves your past returns in electronic format for up to 3 years for no extra cost. (**side note: please also print out a copy of your return and save it for at least 10 years**) This is nice and can provide a valuable reference point when doing your taxes year to year assuming that you completed your return correctly in the past.

Which leads me to my critic of the tax software world. Ultimately the software is only as good as the user answering the questions. Let’s face it, most people do not have a clear understanding of the forms they are completing and would have no idea if a specific schedule were missing. At the end of the day this is the biggest and most looming issue out there, so much so that any other issues I might have had are irrelevant.

Certified Public Accountant (CPA)

I am only going to talk about CPA’s here, there are companies out there that offer tax preparation by folks who are not CPA’s, I would just as soon buy the tax software and attempt it myself. A CPA is a professional who has completed rigorous collegiate education, has passed an even more rigorous series of exams and has logged significant work experience. Needless to say, using a CPA will probably cost you a few more bucks than purchasing tax software but you get what you pay for.

The biggest plus that comes from working with a CPA, in my opinion, is not only the fact that you have a seasoned professional completing your forms; but it is that they actually sign the return as the preparer. If your return is audited by the IRS, the CPA that signed your form can act as support when generating responses and can help answer your questions about what is being requested.

For many people the cost of working with a CPA might not make sense until their financial situation becomes increasingly complicated. Every person’s financial scenario is completely different, choosing between tax software or a public accountant is not only a dollars and cents choice but also a personal preference. Do what feels comfortable.