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Startups: the ultimate long-term investment?
Many of the most well-respected investors in the world believe that taking a long-term perspective has been key to their success.
Legendary mutual fund manager Peter Lynch put it this way, “The real key to making money in stocks is not to get scared out of them.”
Warren Buffett once said that investors should, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Buffett’s partner at Berkshire Hathaway, Charlie Munger, famously said that “The big money is not in the buying and selling, but in the waiting.”
Today U.S. investors do not appear to be following this traditional “buy and hold” advice. According to Reuters, the average holding time of U.S. shares on the NYSE is now at a record low of 5.5 months. That’s down from 8.5 months at the end of 2019. Back in 1970, the average holding period was over 5 years, according to NYSE and U.N. data. It has steadily trended down since then, and just hit a fresh new low.
It appears that a short-term mentality has taken over the investing world. But there’s one asset class where a long-term perspective is still going strong.
Startups: long-term by nature
One of the most unique aspects of investing in startups is its long-term nature. Once you invest in a private company, you’re committed to it for a while. Startups are considered “illiquid assets”, meaning they can’t be easily bought or sold until an “exit” opportunity comes along (IPO or acquisition). Some investors view this illiquidity as a negative. They want to be able to buy and sell on demand.
Others view the long-term nature of startups as a positive thing, because it enforces buy-and-hold discipline. With startups, you don’t have to worry much about taking profits too early, or panicking during a downturn and selling too low. You’re already committed.
The result is that when you invest in the early-stages of a private company, it has years to grow and mature, providing the opportunity for substantial gains over the long-term. Of course, some startups will fail and not return capital to investors. This can seem intimidating at first, but should be expected in the early-stage investing world, and is the reason why venture capitalists like Fred Wilson say it’s wise to spread risk out across multiple startups.
The big idea behind startup investing is that a few long-term winners have the potential to make up for losses, and more. For further insight into diversification, see our article from earlier this year, The importance of startup diversification.
And speaking of diversification, we currently have 51 live deals on the platform! Take a look, and you might find a few worth adding to your long-term portfolio.
Launched this week
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A flexible, high impact learning system for closing the gap in elementary math
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