While some profit-taking was to be expected and accusations of market maker ‘tree shakes’ inevitable, last week’s price falls in Sirius Minerals (LSE: SXX) suggests a toxic combination of unrealistic expectations and impatience led some investors to sell and others to panic and follow suit. But here’s how long-term investors can hold their nerve.

Once upon a time…

As humans, we love stories. In the investing world, Sirius Minerals is the ultimate tale: a future FTSE 100 company, capable of producing £1bn of profit every year for the next century with shares currently priced in pence rather than pounds.

But at such an early stage in this story, investing decisions tend to be driven by expectations than facts. As most memory experts will tell you, when we don’t have complete knowledge, we tend fill in the gaps using our own (sometimes erroneous) beliefs about how the world works. Doing so in large groups sometimes leads to extreme thinking and herd behaviour.

Having unrealistic expectations about a company (whether it relates to releasing information, future profitability or anything else) increases the likelihood of being disappointed. This is why value investing exists. To keep their expectations in check, it may be better for investors to question the extent that Sirius has delivered on its promises so far. And here, the polyhalite producer shines. All planning permissions applied for have been granted, a positive update on Stage 2 financing for the mine (promised before Stage 1 could be finalised) was issued last week and those responsible for its construction have been appointed.  

Since investing involves recognising our limited ability to control events, investors in Sirius Minerals might reflect that a lack of news on Stage 1 funding isn’t necessarily cause for concern.

Don’t just do something, sit there! 

In a study in the 1960s, psychologist Walter Mischel demonstrated how some children were unable to resist eating a marshmallow, despite being assured they would get a second if they refrained from gobbling the first for a few minutes. Follow-up studies revealed those who were able to delay gratification tended to have better life outcomes.

A more recent study altered things by exposing one group of children to unreliable experiences (being promised better crayons but never receiving them) and another to reliable experiences (being promised and duly receiving better crayons). The marshmallow test was then repeated. Those who didn’t receive crayons were less likely to trust researchers to bring the second marshmallow and tucked in to the first. Those who received crayons were able to recognise the benefits of delaying gratification because, like the directors at Sirius Minerals, the researcher kept their promise.

As investors, one of our biggest challenges is delaying gratification. We sell our ‘winners’ too soon, measure performance in weeks not years and always want answers yesterday. This is unfortunate but totally human. Given recent performance, one can only imagine the temptation felt by some long-term holders of Sirius Minerals to sell their holdings. The question is whether, like the children, they trust the ‘researchers’ and can resist the veritable marshmallow currently on offer for the possibility of a full bag in five-to-seven years time. To get them through, it may pay to heed the words of Warren Buffet: “The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.”

Play the long game

Behaving irrationally or impulsively is bad for our wealth. Remaining patient and maintaining a realistic outlook are just two things that investors need to master. Those unable to look beyond short-term setbacks (if any) often make the mistake of selling companies with excellent prospects far too soon.

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Paul Summers owns shares in Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.