They say that in investing, being too early is the same as being wrong.
There’s a lot of truth to that — especially when it comes to things like shorting — but I’m not convinced it applies to growth investing. At least, that is, when the potential upside is large enough.
If, after buying a stock, it goes sideways for three years and then doubles in the fourth year, you still end up with an average compound annual return of almost 19% pa. At about double the market’s long term average, that’s more than respectable.
Moreover, the stock may even suffer a huge drawdown in the interim. It doesn’t matter; so long as the potential is eventually realised.
There are loads of real world examples. Look at Xero (ASX:XRO); someone who bought at the start of 2014 has so far managed to compound their investment at almost 20% per annum over 8 years. In other words, today they are sitting on a 300% total return. And yet, that same person would have been sitting at a loss for the first four and half years — down as much as 70% at one stage — before the investment started to pay off.
That’s a rough ride, for sure, and the timing sucked, but the outcome has nevertheless been fantastic. Today I doubt they’d have any concerns over being too early.
Indeed, had they had the strength of their convictions, our hypothetical investor could have used the opportunity to build the investment at far lower prices and realised an even more spectacular return — both in terms of the percentage and dollar gain.
I’d go even further and say that having the ability to endure, and investing with a long term focus, is one of the few remaining edges you can have as a private investor. You may be up against some very smart, well informed professionals, but almost all of them struggle to think more than a year or two ahead. The institutional imperative, and the short time frames over which they are measured, simply don’t afford them the luxury of a long-term view.
The point is that when it comes to long-term growth investing, timing is really not that important. In fact, as we’ve seen, you’re timing can stink and you can still achieve spectacular long term returns.
Remember, as Buffett said, “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right – that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”
Of course, what matters is that you back the right business (no amount of patience is going to help you if the company you invest in never realises its potential). If, for whatever reason, it becomes clear that your initial expectations are no longer realistic, it’s usually best to cut and run.
So, cast your gaze beyond the next quarter, or even the next year. If you find a quality business with attractive potential for growth, time will be your greatest ally.
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