An entrepreneur is that special breed of person who will back themselves in spite of the odds being against them. Invest in a collection of public companies where they have no influence and where the trading action feels like a casino? No thanks. Invest in themselves to build an enterprise that creates value for customers, employees, and themselves? All day long thank you very much.
Building an enterprise comes with meaningful involvement in the day-to-day operations of that enterprise. Sometimes things go right, sometimes things go wrong. When things go wrong the instinct of the entrepreneur is to (correctly) fix the issue ASAP. Wait too long to stop the bleeding and it might be the difference between flourishing and game over.
Investing in other businesses, however, is a different kettle of fish. When you’re not as close to the action, when you don’t have the same amount of information, it can be more difficult to form useful judgements about the future of the business. Introduce liquidity – allowing for minute-by-minute trading of the securities of said business – and it becomes very tempting to pull the trigger and exit when something (inevitably) goes wrong. In the absence of detailed data, we default to the assumption that price is value, that the price we see quoted on the screen tells us something important about the future of the business, that others know more than we do. The instinct to “do something” kicks in since that’s what we are accustomed to doing with our own enterprise – get in there and fix the problem quickly! When it’s somebody else’s business the only action to take is to sell.
One of the things we do at Bluestone is coach entrepreneurs on how to overcome this impulse for action when investing outside their own business. We don’t pretend that we could teach them to be better entrepreneurs – our clients have instincts, experience, and knowledge far beyond our own. But we can teach them to be better investors.
Take a look at the table below(1). It comes from FPA Crescent Fund. It’s a table of the top ten holdings of the fund that were held for at least three years prior to 6/30/2021. It shows the first purchase date for each stock, and then details a period of flat performance suffered by each stock. Those periods where the stock went nowhere range from more than five years for AIG to less than a year for Comcast, Broadcom, and Charter.
Let’s use TE Connectivity as our example to highlight the value of patience. In April 2015, the stock was around $70. At the end of 2018, the stock was barely above that level. Over a period of 3.5 years the stock round tripped back to where it started – a trying period for most investors, let alone entrepreneurs accustomed to taking bold action. Yet a wider lens reveals that over a longer period of almost nine years the stock delivered handsome results, compounding at more than 20% per year.
Entrepreneurs are willing to back themselves because they have autonomy, control, and they know their business exceptionally well. That conveys staying power when things get difficult.
How to cultivate staying power as a passive investor? How to resist the urge to act when results are not as expected? Know what you own. You can never have the same amount of information as insiders; you can never know the business as well as they do. But you can invest alongside others who have demonstrated knowledge, skill, and integrity – and a willingness to act when THEY see something that’s broken.
Whether it’s another entrepreneur; a management team; a fund manager: if you have conviction you can have staying power.
And if you don’t have conviction then move on; keep your powder dry; and focus on your time and attention on the one asset that you know better than anyone else.
1. FPA Crescent Fund 2nd Quarter 2021 Commentary
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