The Implicit Long-term

This week Umair Haque shared some tremendous observations on our cultural obsession with efficiency. You can read it via Harvard Business Review, here.

As a technologist, I am extremely familiar with what he refers to as Silicon Valley's single-minded focus. For the last decade, and the majority of my career, we've attempted to rebuild our economy on one consumer-convenience after another.

The culture of app-powered chore delegation is implicitly short-term. Each person's allegiance to a particular convenience service is only as long as their patience with it. Meals, ride sharing, home sharing, task help, technical help, copy help, fax machine help. In a decade, we'll have ten options in every category. Each option will have fans, detractors, and a large neutral cohort.

Apparently, institutional investors are starting to agree: Mutual Funds Sour on Startup Investments via Wall Street Journal.

Investment is not like the above-mentioned culture of convenience. At least, investment should not be like that culture. Investment is implicitly long-term.

People are quite good at recognizing the implicit long-term in regards to non-financial investments:

  • We're investing in our children's education.
  • We're investing in our community.
  • We're investing in this mission (charity or otherwise).

Nobody expects these involved parents, neighbors, and philanthropist to give three months or less to their calling. We assume that these people are putting some stake in the ground in order to build a legacy of commitment.

The Market

The presses I read have been abuzz with advice urging, pleading, crying out to retail investors to stay the course, during this turbulent season in the market:

I specifically resonate with Trent Hamm's thoughts on dividends. Steady investors are rewarded for their perseverance. Sometimes in excess of the eventual capital gains. Cashflow and income are practically gospel in the real estate world. Dividends are just like collecting rent from steady, no-nonsense tenants. Pretty nice during a downturn? Right?

Your Staying Point

J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, 'What should I do about my stocks?' Morgan replied, 'Sell down to your sleeping point' Every investor must decide the trade-off he or she is willing to make between eating well and sleeping well. High investment rewards can only be achieved at the cost of substantial risk-taking. So what is your sleeping point? Finding the answer to this question is one of the most important investment steps you must take. - A Random Walk Down Wall Street

The sleeping point is the investment mix that will keep anxiety out of your financial life.

What investment mix will keep you engaged for the long-term?

Some of my colleagues invest solely in real estate. I often hear: "The stock market is rigged against the little guy." I do believe this view is patently false, but the wisdom may be between the lines.

Real estate is implicitly longterm. You can buy and sell many equities, bonds, ETFs, and mutual funds within a single hour.

Locating a property, financing the deal, going through closing, making repairs, finding tenants, and developing property management infrastructure takes time. Once the wheel is in motion, there are laws and leases to keep things in place. The cost of change is high.

Not shockingly, over five years or more, many landlords do incredibly well with income while seeing at least modest appreciation in their properties. Every landlord has bad months (believe me, this has been the year of plumbing for us), but they know it comes out in the long-term wash. If they bought right and are operating correctly, they will not throw a good investment out with a bad season.

Real-estate investing is like small business, each forces you to play your hand in a long game. If you can't handle the long-term in an easy-to-trade stock portfolio, maybe it's the wrong choice for you.

For the Implicit Short-term

Some of us save and invest for goals that are actually quite near in the future. The classic examples include a graduate degree, a family home, or an emotionally (but not financially) positive occupational change.

If you're saving for a short-term goal, then you need to save and invest like a retiree. This means conservative, capital-preserving, income-producing assets. That's right, boring stuff.

I've outlined a method for managing different investment timelines in How to Plan an Anniversary Fund.

Some people go the opposite direction with this. In an effort to make a lot of money quickly, they invest heavily in risky assets. I believe this is the wrong approach.

One of the best things you can do for short-term goals is cut costs and increase income. Focus on downsizing your lifestyle or picking up extra work. This is the hard-won, sincere solution to short-term goal planning.

Just Having Fun

Some people like the thrill of stock picking. For others, the derivatives market has an even bigger thrill: endless possibilities.

Myself and those investors I admire consider these thrills just like walking into a casino. It's not long-term, and for the vast majority of us, it's unadulterated speculation.

I won't discourage pursuing your interests. Just put a cap on the amount of money you can play at the investing tables. The most disciplined gamblers I know have a limit of what they will spend in Vegas. When they (inevitably) run out, they leave town.

Sometimes it's really boring to be a long-term investor. Sometimes your investment vehicle can help you weather the storm. Some thoughts on long-term investment and how to support this millionaire mindset.