Stock market transfers money from impatient to patient: Warren Buffett

The world’s most successful investor, Warren Buffet, famously said “The stock market is a device for transferring money from the impatient to the patient”

Let us try and understand what he means by this quote and how it applies to investors.

Most new investors enter the market thinking they can make quick money. They invest when the stock is going up, but panic when the price begins to fall. Fearing the stock will go down further, they sell – only to later see the price rise and hit new highs.

The Warren Buffett quote also applies to those who have been in the market for a few years and no longer do those ‘new investor’ mistakes.

For those that are more experienced, the impatience lies in not letting profits grow. They sell stocks that are showing 10-20-30% gains, cutting the winners short.

For example: On January 1st 2015, Bajaj Finance was quoting a price of ₹ 345 per share. Exactly 6 months later, on July 1st 2015, the stock had gained more than 60% and was trading at ₹ 555. If you had bought on Jan 1st and sold on July 1st, you’d have made big gains, but today the same company is trading at ₹ 3200 – nearly 10 times more than 2015.

Those who invested 1 lakh in 2015 and were patient enough to hold, would be rewarded with 10 lakhs today i.e 59% compounded annual growth rate. Those who sold at ₹ 555, would now be regretting their impatience.

If you hold a quality company that has performed steadily over the last few years, hold on to the stock, be patient and let it compound.

Quick Tip: It’s better to be impatient with lower quality companies that are correcting because of fundamental issues. Cut the loss early and invest in winning companies that have potential for future growth.