Every investment strategy requires patience.

Let’s say, for example, that you believe, as we do, that small cap stocks tend to outperform large cap stocks over time.

You’ve got the empirical data going back to 1926 that clearly shows, with statistical significance, that small stocks outperform large ones. Small stocks are more volatile than large stocks, but that fits elegantly with the theory that to earn a higher return, you have to be willing to take on extra risk.

That sounds perfectly obvious, but it means that there will be periods where small stocks underperform large stocks. Notice that I said tend to outperform over time, which means not all of the time, especially over short periods.

The point that I want to make today is that these periods can last longer than you think.

Let me give you an example. The microcap fund that we use embodies the small cap outperformance theory (or size premium) because microcap stocks are the smallest of them all.

The average company in the Russell Microcap index has a market capitalization of $379 million compared to $52.3 billion for the S&P 500. That decimal point on large caps is about the size of a micro cap stock.

This particular fund launched in January 1982. Although the academic research, empirical data and theory all made sense, let’s say that you waited three years before investing to make sure that the manager could actually execute the strategy.

The initial data looks great – the microcap fund outperformed the S&P 500 by more than two percentage points per year after fees. The ride is bumpier and there are some pretty tough months. In one month, the S&P 500 gained 12.67 percent and the fund only earned 6.98 percent. Yikes.

Still, it outperformed over the three year period, so you invest. The first year that you’re an owner, the fund underperforms the S&P 500 by -2.25 percent. Since inception, though, the fund still looks good, so you hang on.

The second year of ownership is pretty bad. The S&P is up 18.5 percent but the microcap fund is only up 7.52 percent – a whopping -10.98 percent underperformance. In the two years that you’ve owned the fund, the S&P 500 is up 56.58 percent and you’re up 33.20 percent. It’s good to be up, but not when you’re trailing by that much.

The ‘since inception’ outperformance that you hung your hat on last year has now evaporated, the fund is under the S&P 500 since inception by an annualized rate of -2.41 percent per year.

Any guesses as to how long it takes you to recover from the underperformance and start to outperform?

Nineteen years. The microcap fund, from your purchase date in January, 1985 doesn’t surpass the S&P 500 fund until November of 1994. Along the way it isn’t so bad because to catch up, you have to outperform, but still, it took 19 years just to match the S&P 500 return.

That’s a long time. If you were 40 at the first investment (and you didn’t dollar cost average more or rebalance into the fund), you are on the verge of retirement before your investment catches up with the S&P 500.

Given the incredibly long time horizon, did the investment make sense? Yes, in my view.

First of all, not all strategies take this long. I obviously picked a fairly extreme example to illustrate a point.

Second, it’s not an either/or choice; you would never put all of your money in one or the other. A modest 90/10 S&P 500/Microcap split yielded a marginally better return and, lower overall volatility.

One of the core tenets of modern portfolio theory (and this part is just math) is that you can add a high volatility asset to a portfolio and if the correlation is low enough, overall volatility lowers. If the pieces of a portfolio are zigging and zagging, the overall volatility goes down.

Third, your choices aren’t limited to just these two asset classes. We’ve got small versus large (size), cheap versus rich (value), upward moving versus downward (momentum), quality versus junk (profitability) in the US and overseas – and that doesn’t include what we’re doing on bonds.

In the quarter that just ended, a lot of the strategies underperformed. Like microcap, however, there’s strong empirical data, sensible theories and evidence that the managers can execute the strategies. They all worked beautifully last year, but that’s easy to forget when looking at this quarter’s numbers.

I like what Warren Buffet has to say: Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligence, what you need is temperament to control the urges that get other people into trouble in investing.’

If that one doesn’t do it for you, he also said, ‘the stock market serves as a relocation center at which money is moved from the active to the patient.’

And if Warren Buffet doesn’t cut it, try Aristotle and Plato, who said, ‘patience is a virtue.’ Perhaps they were atop the Acropolis at the time.