In business and investing, it's remarkable how we get so wrapped up in the topics of the day: what will happen to the economy? Will there be a recession? What will the Fed do? What will happen to stocks this year?
Most of this is unproductive. Of course we should plan for future contingencies, that's an essential part of business and investing. But the future is inherently uncertain, and myopically focusing on what happens next only serves to shorten our time horizon to the detriment of long-term goals. Making changes simply to satisfy short-term impulses can also create other problems:
We generate more transaction costs, which erodes long-term performance
We pay tax sooner, which can also erode long-term performance
And we incur more time and effort to find the next opportunity
Better to find really good assets that we can own for a long time: that way we minimize transaction costs, defer tax, and don’t have to expend extra time and cost to find new assets to purchase.
Some assets naturally promote long-term thinking: business ownership, for example, and private real estate. Other assets (like publicly traded stocks) seem to promote minute-to-minute thinking – and therefore the apparent advantage of liquidity is transformed into a major disadvantage.
Many look at the extraordinary reduction in transaction costs for stocks (to $0 - although it's not really zero but that's a story for another day) as an unmitigated positive. But the side effect is a lot of trading and short-term focus, which often isn't positive. Business and real estate have high transaction costs. Which naturally encourage long-term thinking because the impact on returns is significant when you turn assets over every few years at 4-8% cost.
Not all private real estate has that natural long-term bias. Sometimes deals are structured for sponsors to benefit handsomely by generating results quickly. Often the IRR% and promote incentives are great for sponsors but poor for investors, creating a lot of unnecessary friction. We prefer to invest alongside sponsors who invest meaningful personal capital, whose capital is subject to the same costs as our own, and who are incented to create value over a long time period. We'll happily take 20% IRR for 10 years over 30% IRR for 2 years.
All of this is really in service to the magic of compounding. In his terrific book, The Psychology of Money, Morgan Housel points out that while Warren Buffett is undoubtedly a great investor, a large part of his success can be attributed to time. Housel noted that at the time of writing (the book was published in 2020), Buffett's net worth was $84.5B. Of that, $84.2B was accumulated after his 50th birthday. Remarkable. And not a typo – large numbers can get really large when time and compounding to their thing.
"His skill is investing. But his secret is time. That's how compounding works."(1)
Worry about what happens tomorrow? No. But plan? Yes. Plan to let compounding work in your favor. Plan to maximize longevity. Plan for the long run. And let time be your friend.
Housel, The Psychology of Money, p.50.