The Most Quoted, yet the Least understood and under-appreciated Edge in Investing: Power of Time

One can read in almost every investment letter, and interviews of fund managers that they are business owners for the long-term. Thanks to our love for reading, we have inculcated a habit of quoting “Warren Buffett “letters, the law of not interrupting compounding unnecessarily (by Charlie Munger) or the famous Akre fund article on “the art of not selling” on the long termism.

However, in practice, while buying a new business as in investment, people will write their thesis on its long-term potential but once an economic downturn or problems arise, the businesses are shunned quickly. The turnover of the same is justified by various reasons including finding a better business, or a better investment IRR idea. Most of the time the selling is activated by one’s inability to sit through the down phase of a business (which every business goes through) and face flat or declining share prices in the short-term that leads to one justifying a selling. Therefore, most investment managers are not in the business of owning businesses and having a long-term horizon, but are playing the game of maximizing the returns in a short-period of time. 

The long-term horizon and business owner thesis and principles are not thoroughly internalized and a lot of times written just to make the investment thesis a pleasant one to read, despite one’s personality which may be totally the opposite of the same.

A true business owner doesn’t shun the business when it finds a better one or sells it in downturns due to its suppressed future growth outlook for the down-cycle or lower share price.  He doesn't look for the share prices sometimes for months and is only concerned with running a business well for his customers, employees and other stakeholders.

Impatience with the present condition

Modern self-development narratives have glorified the image of always being restless and remaining discontent with the current situation , in the never-ending desire to do and find better . This also reflects directly in the portfolio activities. A lot of times, the justification and continuous forced hunt of new businesses that can justify the replacement of the current ones turn out to be  more of a self-pleasing and ego-boosting activity than of any material positive impact. This never ending pursuit of always being on lookout for a portfolio to be constantly positioned better may very well end up with investments constantly churned out and none of the investment getting enough time duration to realize its potential.

How to tame this?

There are many ways to make money and one can very well make money by constantly churning stocks, but it's best to internalize that philosophy and not confuse that with acting like a true-owner of a business. 

However, if one’s temperament and personality does reflect the aim and ambition to be the long-term owner and collector of businesses with an outcome to compound one’s permanent capital, the power of time is immense. If one’s time horizon is in decades (which is for most of the young investors), one can easily trade-off short term optimization towards a long-term orientation.

A short-term optimization mindset is on constant lookout for changes and tinkering one’s portfolio for the highest IRRs as if it is a mathematical science. With a long-term duration, one can be at peace that such optimization will happen naturally in due course and should not be forced upon each month or quarter. I have myself been a long-time victim of the obsession of optimizing the position sizing of one vs the other business in the portfolio to satiate my intellectual desire of mathematical rationality. 

Absolute v Relative Decisions

We can aim to make selling decisions based on absolute reasons that we have pre-written when the buying thesis was laid out. Selling an investment on a relative basis can create mistakes. The mind has an immense ability to rationalize selling one business for the other. It is one of the most common traps one can fall into. A lot of time we do that in fear of missing out on the opportunity if one doesn’t act right now. 

However, if someone has a multi-decadal opportunity horizon and a regular ongoing incoming capital, one can take peace in the fact that he can slowly build and buy that business in line with the available capital over a period of time. With this horizon, he will aim to match opportunity set only with the available capital. The new opportunity will not be forced by selling another wonderful business from the portfolio. If one has a good investment idea but is short of near-term capital, he can take solace in the fact that his multi-decade horizon will give him sufficient time to slowly build up a good-sized position in such businesses. And even if the price runs up too far and one is unable to do the same, that is fine, and some other opportunity will come soon which will match his available liquidity. 

With such an approach, you can play this game your way for decades by performing dual roles of long-term business ownership, and allocators of new capital.

Private Equity Approach/ Blocks of Coffee-can approach.

It is definitely possible that a business may lose its competitive edge while holding it for the long-term. So, what should be an ideal holding period and how often and frequently should one assess its competitive positioning?. 

A long-term business owner approach doesn't necessarily mean to force oneself to hold a business forever, but should at least give it sufficient time to generate good expected returns during a business cycle .We can draw some good lessons from the private equity investment approach of investing- Every new business bought is aimed to be held for 5-7 year blocks and give it its due time to generate expected returns.

The new opportunities are entertained only with the capital generated naturally via pre-planned portfolio exits or by call of new capital. Copying from the same approach, we can also think of our business ownerships in 5-year blocks. After every 5 years, rather than exiting like a Private Equity, we can re-evaluate whether they still have sufficient merit to justify us being their owners for another 5-year blocks. But constantly evaluating, re-evaluating every quarter or year is meaningless and is reflective of either poor buying process or one’s inability to act as a business owner. 

Investing as a craftsman

Investing is a craft, and a true craftsman is never in a business of optimizing or maximising short-term outcomes. He is focussed on his approach and work based on his principles. He is not obsessed with ‘the best’ or is in the game of optimization and perfection, but in truly living his life by doing the work he loves. The results come up automatically in the end over the long-term.

Akhil D.