It’s About Time

The Globe and Mail article quoted John Huber from a firm called Saber Capital Management in Raleigh, North Carolina.⁽¹⁾ Mr. Huber observed that potential clients often ask him what his edge, or advantage, is over other managers. They are almost always looking for some kind of informational edge or analytical insight that others don’t have, and the market is not aware of. The problem is that such advantages don’t exist any more. There is almost limitless financial and corporate information available to any professional investor, and battalions of brilliant analysts pouring over the data to develop special insights. Mr. Huber believes that every time he has seen someone develop a view they believe is unique, it is almost always understood by many other market participants.

The only sustainable edge, according to Mr. Huber, is to have a time horizon that is different from others. Specifically, it is to have a time horizon that is longer than others. Much of the investment industry is focused on generating short-term results. This is driven by the human desire to belong to a crowd – to invest in the things that are currently popular. It is driven by the desire for instant gratification. And it is driven by investment consultants in the institutional investment world who focus intently on what happens each quarter and think of long-term results as what happened in the last year. In fact, there are so many people, with so many skills, focused on the short term, it is nearly impossible to do better than average for a sustained period. But this obsession with the short term actually creates opportunities for those focused on a longer time horizon. To capture these opportunities one needs a contrarian mindset and to avoid the popular themes of the day, but it is the only approach that can reasonably be expected to offer better returns than average over time.

The Globe and Mail article also was published during the period when we were preparing our annual client presentation on artificial intelligence (“AI”). At each of our three presentations a client asked about how AI was likely to affect the investment management industry. While we recap our answer to this question more fully elsewhere in this edition of Nexus Notes, an important element of the answer is this same idea of time. Just as lots of bright young analysts work feverishly to predict corporate earnings for the next quarter, so, too, is AI mostly focused on finding a short-term edge. So far, the long term remains the domain of investors like Nexus who apply judgement and patience to the information available to achieve something a little different: a superior long-term result, rather than the prediction of a short-term outcome. Of course, future generations of AI may change the investment industry at its core. But today, a human with good judgement and a long time horizon can still be successful.

The concept of time in the investment process also reminds me of the key message that my partner, Devin Crago, relayed to some of our younger clients, and prospective clients, a few years ago. He also published a blog earlier this year, reminding us how valuable time is as an asset. As Albert Einstein famously said, “Compound interest is the 8^th wonder of the world.” The wonder is revealed in a very simple example Devin presented. A 25-year-old who saves and invests $7,450 per year and earns 5% per year on the savings will amass $1 million by the time he or she is 65. If the savings starts at age 35 rather than 25, only $550,000 is saved. Compounding this saving over 30 years rather than 40 years almost doubles the nest egg. Time is an asset that is valuable to someone of my age, but exponentially more valuable to my children. One of the most important things we can teach the younger generation is to understand the valuable asset that they own. After declaring compound interest the 8^th wonder of the world, Einstein went on to say, “He who understands it, earns it. He who doesn’t, pays it.”

The good news implied by Mr. Huber’s comment is that you don’t actually have to be a genius to achieve investment success. There are many geniuses in the investment world who are unsuccessful. You just have to understand that the most powerful tool in an investor’s arsenal is not special information, or proprietary analysis… it is time. Don’t waste it, harness it and enjoy the 8^th wonder of the world.