Time Horizon vs. Endurance

BlackRock CEO Larry Fink once told a story about having dinner with the manager of one of the world’s largest sovereign wealth funds.

The fund’s objectives, the manager said, were generational.

“So how do you measure performance?” Fink asked.

“Quarterly,” said the manager.

There is a difference between time horizon and endurance.

One is how much time you have to achieve your goals. The other is whether you’re situated to hang around long enough to take advantage of that horizon.

Twenty-six drivers started in the 1985 San Marino Grand Prix – a 200-mile sprint. Five finished. The rest ran out of fuel, thanks to a new set of gas-tank rules designed to improve car safety and a widespread miscalculation by almost every pit crew. The guy who finished third literally pushed his gasless car across the finish line.

Every driver knew in advance the time horizon in front of him. But most didn’t match that horizon to the necessary endurance.

We see that in investing, too.

A young investor might have 40 years to save for retirement. But can they withstand a day like yesterday, when the market fell 3.5%? Can they stay optimistic during a deep recession? Avoid chasing what’s done well in the last month? Can they leave their money alone to compound when they’re tempted to buy a boat?

You can buy a 10-year bond. Can you put up with a two-year rout?

A fund manager might want to focus on the next decade. But can they survive investor redemptions after a bad year?

A company might have 24 months of runway. But can the CEO mentally endure grinding for three months on a deal that falls apart? Can employee morale stay intact when growth stalls for a few quarters?

Long-term focus is great. But the long run is just a collection of short runs that need to be managed.

It’s wrong – dangerous – to assume that because you have a long time horizon you can ignore the short run. If you ignore something, you’re unprepared for it. And when you’re unprepared for it it will eventually take advantage of you. The beauty of a long time horizon is capturing a compounding effect that others who quit before you forgo. But that only works when you’re keenly aware of, and prepared for, and managing for, the kind of short-term stuff that people with shorter time horizons don’t want to deal with.

John Maynard Keynes allegedly put it like this:

A speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.

Speculators (short time horizons) generally know how much endurance they need. Investors (long time horizons) often don’t because they wrongly assume their long-distance goals mean they can nap through day-to-day life. Yes, some people can calmly respond to day-to-day hassles. That’s the trick to long-term thinking. But it’s different from ignorance. Having the endurance to make long time horizons work means your allocation, cash flow, and mindset are intentionally designed to deal with the nonsense that occurs within short time horizons.

Tyler Cowen wrote:

Plenty of companies have made big mistakes from thinking too big and too long-term; for instance, a lot of mergers were based on notions of long-run synergies that never materialized. In reality, short-term improvements are often the best way to get to a good long-run plan.

“I finally get a car I can drive as I like it, and I run out of gas,” said Grand Prix driver Keke Rosberg in San Marino.

“I mean, is this racing?” he asked.

It’s long-distance racing when you don’t manage for short-term endurance.