Everyone is a trader; the only difference is in time horizon. Investors (or traders) buy something hoping that one day it’ll be worth more than what they paid for it. The longer they hold onto a stock, the more money they hope to make. It’s the classic investor mindset of getting paid to wait.
The psychology behind determining which stocks/investments to hold for the long haul, and which ones we flip relatively quickly has always fascinated me. I frequently find that great companies are sold too early, and the bad ones are held too long.
What Makes an Investor Hold for a Long Time
1. World-Class Communication
Three things can destroy a relationship: lack of effort, unrealistic expectations, and poor communication.
In some ways, investments are analogous to romantic relationships — the longer you hold, the harder it is to say goodbye.
To hold an investment for a long time, you need to understand what is going on with the company. That requires regular and thoughtful communication from management to shareholders.
Investors want to hear from the company, and not just through the odd press release...
Regular web conferences, tutorials, demos, and Q&As go a long way in explaining to investors what the company’s road map for success looks like while also managing expectations.
Far too often, I hear investors talk about how the next quarter will be ‘the quarter’ where this venture they invested in goes from being unknown to hitting the mainstream. Exponential growth like that doesn’t happen overnight (or from one quarter to the next), and I attribute that type of unrealistic expectation to poor education from the company to the investor.
Consistent shareholder communication is foundational in setting realistic expectations for growth. And realistic expectations from your investors create long-term shareholders and supporters. Early-stage companies who properly manage expectations have a better shot at success than those which give overly ambitious development timelines.
2. Comfort from Knowledge
The investor must have a depth of knowledge in the space in which the investment applies. Sometimes just knowing the risks intimately enables an investor to have the fortitude to hold for a long time.
One of the biggest blunders of my career occurred when I invested in a technology that I didn’t understand well. The tech company appeared to be struggling for about a year, and I sold for roughly a break-even. Less than a year after selling my position, the company’s engineering team came through in the clutch and created a relatively good product. I left a couple million dollars on the table.
3. Management has Obvious Core Competencies
I can hold onto an investment a lot longer when I am impressed with the company’s leadership team.
To hold tight during those volatile early days, a belief that management can gracefully overcome challenges while managing people is critical for an investor to stay in the game.
If I like the people, I’ll probably hold the stock in tough times.
4. A Belief that the Company is Unique or Special
If the company is just another semiconductor manufacturer or ride-hailing app, it’s hard to get excited. It isn’t easy to get attached because there are dozens (sometimes hundreds) of other comparable companies. That’s why I love learning from founders why they think their company is ‘one of one.’
I almost always want to work with a company that believes it is in a league of its own. The reason being, if they succeed during their development/commercialization phase, they’ve created a market all to their own — which often means astronomically high margins.
Why Investors Hold and Why they Sell
Anytime humans are involved in a process, it’s a guarantee there will be a level of uncertainty and irrationality. Investors demonstrate this perhaps better than any other group. Think about how often the stock market is overbought and oversold…
However, the companies that keep shareholders over the long-term take the time to educate and communicate with stakeholders, make a logical case why they are a ‘one of one’ organization and have a management team with world-class expertise in their field.