In 1972, a small boy sat at an unassuming table.
In front of him was… a marshmallow.
The premise was simple.
Wait 15 minutes to eat it, and he would get one more. Or… he could eat it now and he wouldn’t get an extra marshmallow.
You may have already heard of this experiment. Conducted by psychologist Walter Mischel from Stanford University, the iconic test measuring delayed gratification was then used to link the ability to delay gratification with success later in life via a variety of measures (e.g., good SAT scores, better prepared for adult life, etc.).
And the world of investing is no different. Here are three ways that delay gratification will help you as an investor.
1. Saving vs. spending
Its hard to invest without capital. Its also hard to save money when your country (Singapore in my case) has a relatively high cost of living and Apple seems to come out with a new must-have iPhone every other year. Between bills, mortgages, holidays, and spending on significant others, it can seem impossible to even set aside a portion of your monthly salary to invest.
Yet the simple math of it is that you must. Because capital is key to your absolute returns.
50% returns on $10,000 capital is a mere $5,000.
But just 5% returns on $1 million capital is $50,000.
That amount in passive income is almost good enough for some people to decide to retire early and call it day. In any case, an extra $50K every year will go a long way toward building your wealth.
And think about this: Averaging 50% returns is not easy. But 5% per annum? Very easily done.
Besides aiming for good returns, saving up to build your capital base is just as important (if not more!).
Saving is delaying gratification.
2: Holding on to winners
It’s always tempting to try and sell something quickly once you’re green and profitable. Maybe you bought $50,000 worth of Apple shares and it rose 10%. A cool $5,000! Wow. That might be a month’s salary for some people. But history proves that for most great companies, sitting on them and doing nothing once you’ve bought in at a great price is often the right thing to do.
Terry Smith of Fundsmith, who emphasizes a value investing long-only approach, says their code is structured around three simple rules:
- Buy great companies
- Don’t overpay
- Do nothing
Doing nothing is hard when you think you can sell a great company quickly and earn 10% to 50% profits. But investing is a game measured in decades. Not weeks. Look up any of the corporate giants (Facebook, Apple, Amazon, Netflix, Google) today and picture selling every time after a 10% gain.
You will be quickly removed of the notion of selling for quick profits.
3. Waiting for the right price
A lot of what we investors do is just study. We study great companies. We examine culture, moats, profitability, secular tailwinds, business models. But above all, we prize great companies.
Often, our vision of a company being a great business is shared by the market at large. This often means that the valuation multiple is also relatively high. (Apple, for example, has not traded near 20 times earnings since 2020.)
This often means we are forced to sit tight and wait for the opportune moment, utilizing market panics and pullbacks to invest in companies we desire a piece of (the pandemic in early 2020 was one such opportunity). This can sometime mean years of waiting. But patience, and the ability to wait, brings great value to all investors.
It’s cliched saying but indeed ‘Good things come to those who wait.’