A Tale of Two Mindsets

To my partners, 

When it comes to making significant purchases, people tend to be meticulous and research-driven. Buying a new fridge, groceries, or a car often involves thorough comparisons, reviews, and financial planning. However, when it comes to investing in the stock market or other financial assets, a different mindset often prevails. This disparity in approach can lead to reckless decision-making and significant financial losses.

The Research-Driven Approach

Consider the process of buying a new car. You research different models, compare features, read reviews, and test drive vehicles. You consider factors like fuel efficiency, maintenance costs, and safety features. You might even consult with friends, family, or experts to ensure you're making an informed decision. This diligence is driven by the understanding that a car is a significant outlay of capital that will impact your daily life.

Imagine dedicating hours to researching your next family vacation, meticulously comparing options, prices, and itineraries to ensure every detail is perfect. You scour the web, read reviews, and weigh the pros and cons of each choice, all to secure the best value for your hard-earned money. But when it comes to investing in the stock market, do people apply the same level of scrutiny and diligence?

The Contrast with Investing

Fast forward to the world of investing, and the approach is often jarringly different. Rather than thorough research, I hear cavalier statements like, “I'm putting 10% of my money into this because that's how much I'm willing to lose” or “My friend told me this stock will 10x so I’ll put $5,000 into it.” This throwaway mindset is staggering, especially when compared with the meticulous planning that goes into something as seemingly inconsequential as a family vacation. When it comes to investing, shouldn't we demand the same level of thoughtful consideration as we do for our hard-earned vacation dollars? Investing should be a calculated decision, not a reckless gamble.

These examples may seem extreme, but they are based on real-world observations. As an observer of investor behavior, I have witnessed each of these scenarios unfold. While I often offer my perspective on investment strategies, it's essential for me to acknowledge that each individual has their own unique approach to managing their finances. Ultimately, the decision of how to allocate one's capital is a personal one, and investors must decide what approach best aligns with their goals and risk tolerance.

Observations

Great investment ideas are exceedingly rare. Warren Buffett has often highlighted that the bulk of Berkshire Hathaway's success stems from a mere handful – think 5 to 10 – of strategic investments made over six decades. Charlie Munger has echoed this sentiment too, underscoring the importance of patience and focus in investing. Consider the remarkable track record of these two investing legends, who have spent a lifetime scouring opportunities to identify exceptional businesses. Their success is a testament to the power of concentrated, well-timed bets on rare and outstanding investment opportunities.

The truth is, identifying true winners is a daunting task that requires patience, discipline, and a deep understanding of the markets. But there's a more profound force at play here - our own cognitive wiring. Humans are evolutionarily programmed to prioritize short-term gains and react to immediate threats, a trait that served our ancestors well in the fight for survival. However, when it comes to investing and “delayed gratification”, this same wiring can be a recipe for disaster. In a world where compounding wealth requires patience and foresight, our instinctual focus on the near-term can prove to be a death sentence for our financial futures.

Warnings

I read a recent Wall Street Journal article that further underscores my concerns about the mental framework many young people bring to investing. It's alarming to see young teens being encouraged to dive headfirst into the stock market, treating it like a casino where they can make quick profits with minimal understanding of the risks. The recent trend of teens flocking to the market, fueled by custodial accounts and a get-rich-quick mentality, is a recipe for disaster. Rather than fostering a culture of responsible investing, we're creating a generation of novice traders who are more likely to blow up their accounts than build long-term wealth.

This isn't just a matter of individual recklessness; it's a systemic issue. By allowing – even encouraging – young people to engage in short-term, high-risk trading behaviors, we're setting them up for financial disaster. The inevitable next step is a fascination with even riskier products like cryptocurrency, options trading, and margin accounts. It's a slippery slope, and I predict it's only a matter of time before we see a wave of financial ruin wash over this generation.

As someone who values striving to be a “learning machine” I'm appalled that we're more focused on feeding the market's appetite for trading activity than on teaching young people the fundamentals of investing. We're prioritizing short-term thrills over long-term financial stability, and it's a catastrophic mistake that will have far-reaching consequences.

This behavior is certainly not limited to young teens. In this article, it showcases the every-present “mob mentality” in US military service members. The military's reliable paychecks and benefits can actually make it easier for service members to take on excessive risk, knowing that their financial safety net is more secure than most.

However, this behavior is still troubling, not just because of the potential financial consequences, but also because of the way it can spread within the close-knit military community. When one person gets involved in a high-risk investment, it can create a ripple effect, influencing others to follow suit without fully understanding the risks. It's not that service members are more prone to financial recklessness, but rather that the stability of their income can mask the risks associated with these investments. Meanwhile, the social proof and camaraderie within the military can make it easier for bad financial habits to spread. It's a situation that warrants caution and financial education. 

Closing

As I move forward, I'll continue to focus on gaining wisdom and taking deliberate steps in the business world, investing with a long-term perspective regardless of market conditions. The era of buying companies at 2-3 times book value or a third of their liquidation price, as experienced by Buffett, Munger, and Graham, is largely behind us. Today's markets demand a more nuanced approach, and I'll remain committed to learning from the legends who paved the way, while navigating the unique challenges and opportunities of this new landscape. 

Despite the prevailing market behaviors that I find troubling, I'm confident that TimeHorizonLP will reap significant financial rewards in the long run. As the saying goes, "Time is the greatest teacher of them all, the revealer of reality." Ultimately, the test of time will distinguish between fleeting speculation and enduring value, and we're positioned to benefit from the lessons that the market will inevitably teach.

Our mission remains the same: invest in exceptional companies with strong business economics and harness the power of compound interest to drive long-term wealth creation. Thank you for reading! 

Kyle Delmendo

Founder, General Partner, CIO