Read on Twitter
What do Buffet, Klarman and many of our favourite Fin/SMB/RE-Twit follows have in common?
(Cc: @BrentBeshore @sweatystartup @tsludwig for a few!)
They are playing long-term games
In this (debut!) thread, I’ll summarise the below article - On the Nature of Long-term Holds: https://twitter.com/tsludwig/status/1343240765065949185
(Cc: @BrentBeshore @sweatystartup @tsludwig for a few!)
They are playing long-term games
In this (debut!) thread, I’ll summarise the below article - On the Nature of Long-term Holds: https://twitter.com/tsludwig/status/1343240765065949185
1/
Who are the wealthiest people you know?
Ask yourself this question. If you’re anything like me or the authors’ students then the answer is clear
Business owners.
But why is this the case?
Who are the wealthiest people you know?
Ask yourself this question. If you’re anything like me or the authors’ students then the answer is clear
Business owners.
But why is this the case?
2/
The term business OWNERS is more specific than meets the eye
These are people that own businesses for very long time periods, allowing compound interest to work its magic
The impacts are mind-boggling as illustrated in the example:
The term business OWNERS is more specific than meets the eye
These are people that own businesses for very long time periods, allowing compound interest to work its magic
The impacts are mind-boggling as illustrated in the example:
3/
A business owner (Sam) starts with $1m. This is invested over 25y at 15%
After 10 years Sam’s $1m has grown to $4m
So how long until Sam adds another $3m in value? Just 4 years
And by year 23 Sam is adding $3m in value in a single year
By year 25 Sam’s $1m is worth $33m!
A business owner (Sam) starts with $1m. This is invested over 25y at 15%
After 10 years Sam’s $1m has grown to $4m
So how long until Sam adds another $3m in value? Just 4 years
And by year 23 Sam is adding $3m in value in a single year
By year 25 Sam’s $1m is worth $33m!
4/
Wealth is created by compounding and time. Business owners know this and focus their efforts on long-term games accordingly.
They find good opportunities and then they don’t sell.
But why the aversion to selling?
Wealth is created by compounding and time. Business owners know this and focus their efforts on long-term games accordingly.
They find good opportunities and then they don’t sell.
But why the aversion to selling?
5/
Firstly, when we sell we incur taxes and fees
If, as before, Sam invests $1m for 25 years at 15%, Sam ends up with $33m. After 25% capital gains tax this becomes ~$25m
Firstly, when we sell we incur taxes and fees
If, as before, Sam invests $1m for 25 years at 15%, Sam ends up with $33m. After 25% capital gains tax this becomes ~$25m
6/
What happens if Sam instead sells every 5 years, pays tax on gains and reinvests instantly in another business at the same 15% return?
After 25 years, Sam is left with $17m.
Still a great outcome but Sam is 1/3 worse off.
What happens if Sam instead sells every 5 years, pays tax on gains and reinvests instantly in another business at the same 15% return?
After 25 years, Sam is left with $17m.
Still a great outcome but Sam is 1/3 worse off.
7/
Of course, this assumes Sam can instantly find attractive opportunities
In reality, good, new investments are scarce, take a long time to find, and are inherently riskier as we know less about them
If your own investments have good prospects, think twice before selling
Of course, this assumes Sam can instantly find attractive opportunities
In reality, good, new investments are scarce, take a long time to find, and are inherently riskier as we know less about them
If your own investments have good prospects, think twice before selling
8/
Business owners understand that selling is costly and finding new investments to redeploy proceeds into is very difficult.
So when should we sell?
Business owners understand that selling is costly and finding new investments to redeploy proceeds into is very difficult.
So when should we sell?
9/
In short, the authors argue that we should only sell we the investment thesis changes.
They offer rebuttals to common sale motivations: diversification, liquidity and generous valuations:
In short, the authors argue that we should only sell we the investment thesis changes.
They offer rebuttals to common sale motivations: diversification, liquidity and generous valuations:
10/
The value of both liquidity and diversification diminish quickly beyond a certain level and can be achieved without an outright sale.
The financial benefits of long-term compounding outweigh even highly generous valuations (at least in high-return businesses)
The value of both liquidity and diversification diminish quickly beyond a certain level and can be achieved without an outright sale.
The financial benefits of long-term compounding outweigh even highly generous valuations (at least in high-return businesses)