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The Sequoia Fund's Founders on Patience

The Sequoia Fund began life in 1970 following Warren Buffett (Trades, Portfolio)'s request that they help his partnership's investors manage their money.

Buffett decided to close his investment partnerships in the late 1960s. He wanted to recommend someone he could trust to his partners if they didn't want to continue investing with him as the CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).

Ruane, Cunniff & Goldfarb L.P. was formed as a result. Today, the firm has one of the best reputations and mutual funds of all time.

Investment advice

The investment advice and commentary provided by Bob Goldfarb and Bill Ruane over the years has been highly informative and insightful. For example, at the 2003 Sequoia annual meeting, Goldfarb said the following about the problem of holding high-quality stocks over the long-term:

"If you look at the stock price performance of great companies over many decades...there is a very high probability that you will find a fairly long stretch of years when their stock prices just marked time or even declined.

Living through that long dry spell is the price that long-term investors must willingly pay if they believe that they own truly outstanding companies with the legs to go the distance. The challenge is to differentiate those companies that are truly exceptional from the many pretenders and wanna-bees."

The value fund manager was commenting on the particular performance of three key stocks, which were, at the time, the most substantial holdings in Sequoia's portfolio. These were Berkshire, auto insurance group Progressive (NYSE:PGR) and Fifth Third Bancorp (NASDAQ:FITB).

In the dot-com bubble, all three of these stocks surged, but the bubble had burst by 2003. Sequoia had to weather a period of sub-par performance before growth returned.

But that was just part of the investing process, as Goldfarb explained in 2003. What's more, as the fund manager also highlighted, while hindsight might be a wonderful thing, in the real world it's almost impossible to time the market correctly:

"When you make a decision to sell a stock because you believe that the valuation of the company is too high, your timing has to be pretty precise. There may be some people who are very good at that. Experience, however, has taught us that we are not good at timing sales prompted by concerns of temporary overvaluation.

We have had much more success identifying terrific businesses and monitoring their progress closely through extremely intensive research.

As long as that research shows that these companies remain terrific we are willing to hold the shares unless they sell at insane prices."

Fundamental research

This advice remains just as relevant today as it was in 2003. Timing the market is virtually impossible, both for selling and for buying. Conducting fundamental research is much easier.

If you focus on finding securities that are undervalued and have the potential to grow over many decades, there is no need to waste time trying to time the market. The downside of this is that long-term investors have to be prepared to weather market volatility. A high-quality stock might go nowhere for a year or two before suddenly jumping. It is essential to stay focused on the fundamentals and not let stock price action confuse your decision making.

A great way to do this is to keep investment notes. This will give you something to refer back to every time you question the logic of an investment.

Little mental tricks like note-keeping are an excellent way to train your mind to ignore the noise of the market and focus on the essential factors, such as long-term growth and value creation, instead of the day-to-day gyrations of the stock market.

Disclosure: The author owns shares in Berkshire Hathaway.

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This article first appeared on GuruFocus.