In a world where everything needs to happen close to instant, delayed gratification is a concept that is lost among many. Getting instant gratification for action is the expectation nowadays among investors in the stock market. This leads many to take profit immediately, which significantly hurts their return in the long run.
In this post, I’ll be going over the importance of delayed gratification and how it can give you outsize returns.
Disclaimer: None of what I’m talking about should be considered as financial advice. It is for entertainment and educational purpose only.
What Is Delayed Gratification
Delayed gratification is simply the process of resisting an immediate reward for a reward at a later time. In the context of investing, it is resisting to take profit when a stock goes up by a few percent so you can take profits for significantly more later.
Characteristics of Delayed Gratification
The idea behind delayed gratification seems so simple and logical, yet many investors struggle with it. This is usually because they are impatient and want a reward immediately. Taking profits for a small gain is nice, but that means you won’t be getting any big gains.
To be good at delayed gratification, one must have patience and self-control. Guess what? Both those characteristics are what allow you to resist the urge to take profits on the small gains.
Big Returns Comes With Time
The price of a company’s stock doesn’t always go up even when the company itself is doing great. Sometimes, the price might even be going down when the company is operating on all cylinders. This type of situation can be frustrating for those who are impatient, but it is a golden opportunity for those who can handle it. As long as the company is doing great the price will always catch up to reflect it.
Understand Delayed Gratification by Analogy
Consider the case of a farmer who plants crops for a living. The process can be broken down into a few overarching steps:
- Get the soil ready
- Plant the seeds
- Provide nutrients for the crops to grow
- Harvest the crops when the time is right
It takes time, effort, and commitment to get to the point where the crops are ready for harvest. This process is like delayed gratification when it comes to investing.
- Get the soil ready <–> Research companies
- Plant the seeds <–> Invest in companies
- Provide nutrients for the crops to grow <–> Follow the company and grow investments
- Harvest the crops when the time is right <–> Take profits when the company grows into your goal
Now let’s imagine if the farmer prematurely harvests the crops. The farmer planted the seeds and as soon as a few crops start growing the farmer starts harvesting. In this case, much of the farmer’s hard work would go to waste as it would yield a small harvest despite the enormous amount of work to get started. For investing, it is the equivalent of taking profits when the price starts to move up.
Investing is a marathon therefore if you want to do well, you’ll need to learn delayed gratification. Anything can happen in the short term but in the long term, the trend will be up. This is assuming you have done your due diligence to pick companies that will thrive in the future.
Are you struggling to hold onto the companies you have chosen? If so, you should definitely check out this post about successfully carrying out a buy-and-hold strategy.
It is also important to have the right mindset when it comes to investing. To learn how important your mindset is you can check out this post on the topic.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.