Know what it is?  I learned it over 30 years ago the hard way. 

The secret is patience.

Back then I discovered that if I stuck with my ownership-based investment strategy over the long haul and outlasted the quitters and ignored the critics, I would someday be in a better position than the majority of my peers. 

This is why I continue recommending the investment model I’ve used since then:

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When talking about the stock market these days, it’s easy to be wooed into becoming a long-term pessimist.  Last Friday, the S&P 500 closed at 1239.  Contrast that to where the index was trading at 10 years ago - 1164 - and you end up with a gain of about 6.4%. 

So why am I still so enthusiastic about my “stocks for the long run” philosophy? 

Take a look at history. 

The last time we went through a similar market environment was from about 1969 to 1982.  Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory. 

But people who maintained their discipline and continued acquiring equity positions were rewarded for it. 

From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it.  Or there were others who prospered simply from dumb luck for being in the right place at the right time. 

You see, tangible assets - real wealth - does not vanish in a market decline.  Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.   

And that’s the way it has been throughout history. 

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Sir John Templeton has died at the age of 95.  He was one of the great minds in the financial community as well as one of my early mentors.  Below are some key excerpts from his 1993 article ”16 Rules For Investment Success.”  They are as true today as they have ever been.

I can sum up my message by reminding you of Will Rogers’ famous advice:

Don’t gamble.  Buy some good stock.  Hold it till it goes up . . .and then sell it.  If it doesn’t go up, don’t buy it!

There is as much wisdom as humor in this remark.  Success in the stock market is based on the principle of buying low and selling high.  Granted, one can make money by reversing the order - selling high and then buying low.  And there is money to be made in those strange animals, options and futures.  But, by and large, these are techniques for traders and speculators, not for investors.  And I am writing as a professional investor, one who has enjoyed a certain degree of success as an investment counselor over the past half-century — and who wishes to share with others the lessons during this time.

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That’s not my rule; it’s THE rule!

As an investor, you understand that the market is like a yo-yo climbing a flight of stairs. With that, you accept the likelihood that you will lose money about 3 out of every 10 years.

Speculators think that they are so clever that they can time the market and know when to get in and out of it.

So let’s define the difference.

Investing is:

• Putting money to work that you don’t need to spend in the short term and leaving it alone without moving it around or chasing recent winners.
• Keeping your arms crossed and staying disciplined while the crowd is urging you to sell.
• Taking your profits when everybody else is eager to buy.
• Owning a diversified portfolio with exposure to assets offering real world financial safety — in other words, a place where your money is safe in any economic environment.

Speculating is:

• Betting you can outsmart and outperform the market over a long period of time.
• Basing investment decisions on forecasts, computer trading systems, or technical analysis.
• Following the alluring advice of hucksters and charlatans offering you the golden promise of prosperity . . . for a hefty fee, of course.

There is an old Wall Street adage that says, “Bulls make money, bears make money, but pigs get slaughtered.” Amazing how simple the truth can be, isn’t it? Then how come so many so-called investors (hopefully not you) continue gambling with their serious money?

Because it seems so easy. Just look at all the material you receive in your inbox about how you can get rich trading stocks in your spare time. Or last year’s winning mutual funds touted on TV and on the radio. It’s all nonsense.

For over three decades I’ve witnessed thousands of people successfully build wealth but I have to see any of it maintained when achieved through speculation. Sure, a few luckly souls manage to make it big in a short period of time but just as quickly as their wealth was created, in no time at all it is often lost.

Here’s the reality check: Nobody I know and nobody you know has built (and more importantly) maintained wealth through speculation.

I don’t have anything against speculation so long as you are doing it with your “play money” - which is the money you can afford to lose. But most of time here we are dealing with your serious money . . . the money you need for retirement . . . and that is money you CANNOT afford to lose through speculation.

Understanding the difference between investing and speculating is key to the long term outcome of your financial future. If you are an investor, I commend you for your discipline and hope you stick with the program.

If you are a speculator . . . well, good luck.

When asked to state the average return of the stock market, what is your answer?

10 to 12 percent?

It’s true that this falls in the range of historical, long-term average market returns but to me, average is anything but average. 

Let’s say you and are taking a three day vacation and I tell you the average temperature is going to be 70 degrees.  What would you pack to wear?  Based on the information you know, a cotton shirt and a pair of light weight fabric pants would keep you quite comfortable. 

On this trip we start off in Omaha, NE where it is 85 degrees.  Then we head south near the equator where it is 105 degrees.  After that it’s off to the southern tip of Argentina where it is 20 degrees. 

The average temperature of these three locations is 70 degrees but how would this temperature “volatility” make you feel?  My guess is pretty uncomfortable since the actual temperatures were not in line with your expectations. 

The same holds true with stock market volatility and investor expectations.  Non-savvy investors look at the historical market returns and expect to earn 10 to 12 percent most years.  Savvy investors look at the same historical data but understand that “average” does not mean “likely.”

KEY LESSON:  Short term, the stock market is going to be volatile and the returns investors earn will vary considerably.  This will cause market timers and day traders to attempt to make speculative bets and most will lose.  It will also cause the mainstream investor to get greedy or fearful then wind up chasing performance and perceived safety thus ending up with sub par performance. 

But the most successful investors will be those who remain broadly diversified across mutual funds of common stock and maintain a long-term time horizon.  To them, market volatility is a non-issue and most will view market declines as a buying opportunity. 

In the short-term, those investments will bounce around like a handful of yo-yo’s.  But long-term, those yo-yo’s are bouncing up a flight of stairs. 

SO HERE’S YOUR REALITY:  Where does your focus lie?  On the yo-yo’s or the flight of stairs.  Your answer will tell me a lot about your long-term financial success. 

When dealing with the investment markets, there are no guarantees and any investment comes with some level of risk.  The key is to manage that risk and minimize is so that the odds of building and maintaining your wealth are on your side. 

There’s your financial goal.  Mine too!