Despite its value barely keeping up with the rate of inflation, why do most people say buying their home was their greatest investment?
Time.
Buying a home is about buying a place to raise and protect your family rather than making a short-term profit. A rising property value usually becomes a concern only when it is time to sell the home. Subsequently, people own their homes on average for long periods of time, 12-13 years on average.
Allowing the value of a home to grow over a long time period (even at a low rate), coupled with paying down a mortgage, produces large gains in a home’s equity.
Owning a cash flow positive business is arguably a better investment than owning a home since the business pays you. Like owning a home, the more time you give a free cash flow generating business to grow, the better off your investment will become.
People are not doing this.
From Morgan Housel’s How to Ruin Your Life.
In 1940, a 50-year old had a life expectancy of 21.9 years, and the average stock was held for about seven years. By 2010, a 50-year old had a life expectancy of 29.6 years, and the average stock was held for less than a week.
Now compare that to John Hay’s goal of buying two shares of the New York Tribune Newspaper back in the early 1870s.
Hay joked to Bigelow “I shall take my own medicine as soon as I own two or three shares of Tribune stock” – an impossiblity, at least for the foreseeable future, since only one hundred shares existed, each valued at $10,000.
From All the Great Prizes: The Life of John Hay, from Lincoln to Roosevelt by John Taliaferro
$10,000 back in the early 1870s is about $247,000 today. If you had to save up $247,000 to buy one share in a company, how long do you think you would hold onto that share? Also, how selective would you be in determining which company to buy shares of?
Because it is so easy to trade stocks, it is easy to forget what owning stock really means. It is an equity stake in a company. You are an owner of the business, and you have a claim on its profits.
Businesses need time.
The time to reinvest profits.
Time to reduce costs.
Time to gain market share.
Time to increase cash flows.
Time to increase value for its shareholders.
Giving a business time is one of the hardest things to do in our fast-paced world, but if you own shares in a high-quality company, it is one of the greatest things you can do for your portfolio.
Quality Time
Quality companies with durable competitive advantages benefit the most from the power of time.
Quality companies typically have more stable and predictable cash flows, reducing the pressure to time your entry and exit perfectly.
Their robust business models often enable them to weather economic downturns better than lower-quality peers, making it easier to hold them through market volatility.
Most importantly, quality businesses tend to have longer reinvestment runways.
This means they can continue to deploy capital at high rates of return, creating a compounding effect that builds substantial value over time. While an average business might exhaust its high-return investment opportunities within a few years, forcing it to accept lower returns or make risky bets, quality companies can often sustain their advantage for decades, leading to massive gains in shareholder value.
The next time you’re tempted to sell a high-quality holding whose underlying business fundamentals have not changed because of short-term price movements or because it seems “expensive” relative to the market, remember what Budd Askins said in the show Fallout.
Time is the Ultimate Weapon.