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The Long-Term Approach
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Given the proclivity of Mr. Market to plead temporary insanity at the drop of a hat, we strongly believe that it's not worth devoting any time to predicting its actions. We're not alone in this. After talking to literally thousands of money managers over the past 15 years or so, "we've discovered that none of the truly exceptional managers spend any time at all thinking about what the market "will do in the short term. Instead, they all focus on finding undervalued stocks that can be held for an extended time.

There are good reasons for this. Betting on short-term price movements means doing a large amount of trading, which drives up taxes and transaction costs. The tax on short-term capital gains can be almost double the rate of long-term capital gains, and constant trading means paying commissions more frequently. As we'll discuss in Chapter I, costs such as these can be a huge drag on your portfolio, and minimizing them is the single most important thing you can do to enhance your long-term investment returns.

We've seen this borne out in long-term studies of mutual fund returns: Funds with higher turnover—ones that trade more—generally post lower results than their more deliberate peers, to the tune of about 1.5 percentage points per year over 10 years. This may not sound like much, but the difference between a 10 percent annual return and an 11.5 percent annual return on a $10,000 investment is almost $3,800 after 10 years. That's the price of impatience.

Having the Courage of Your Convictions

Finally, successful stock-picking means having the courage to take a stance that's different from the crowd. There will always be conflicting opinions about the merits of any company, and it's often the companies with the most conflict surrounding them that make the best investments. Thus, as an investor, you have to be able to develop your own opinion about the value of a stock, and you should change that value only if the facts warrant doing so— not because you read a negative news article or because some pundit mouths off on TV. Investment success depends on personal discipline, not on whether the crowd agrees or disagrees with you.

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