Permanent capital: why time is the most powerful investment tool

There is a thought experiment that Warren Buffett, one of the most successful investors of all time, regularly uses to illustrate his approach. Imagine, he says, that at birth you are handed a ticket with twenty boxes on it. Every time you make an investment decision, one box is punched. Once all the boxes have been used, you may never invest again. How carefully would you then weigh each decision?

The ticket does not exist in reality. But the logic behind it is powerful. Most investors make far too many decisions, far too quickly, based on information that has little short-term relevance to the true value of what they own. The investors who perform best over time are usually those who trade the least but choose most carefully what they own and how long they hold it.

The time horizon as a competitive advantage

In the investment world, an investor's time horizon is one of his strongest competitive advantages, but also one of the hardest to preserve. Most institutional investors are assessed on a quarterly basis, and that review cycle inevitably shapes the investment decisions they make. Someone who knows his performance will be judged over three months behaves fundamentally differently from someone who knows his capital is committed for ten or twenty years.

That is the heart of the power of what the financial world calls permanent capital: equity capital with no fixed end date, which cannot be reclaimed by investors in the short term. When a holding company has permanent capital at its disposal, it can enter into investments that need ten, fifteen or twenty years to reach their full potential, without the pressure to sell along the way at an unfavourable moment.

What forced selling destroys

The most underestimated cost in the investment world is forced selling at the worst possible moment. An investment fund with a fixed ten-year life must sell all of its positions at the end of that period, regardless of market conditions. If those ten years end in a period of low prices, such as 2009 or 2020, assets are sold that might have needed years more to unlock their true value.

A holder of permanent capital never has to do that. It can wait. It can keep receiving the cash flows from its holdings while the market recovers. It can even buy more when others are forced to sell, which historically has been the best way to generate exceptional returns. The financial crises of recent decades have confirmed this pattern time and again: the investors who were able to hold through the crisis, and even strengthen their best positions, achieved the highest returns over the long term.

Dredging and building: infrastructure as a permanent investment

Infrastructure is exceptionally well suited to permanent capital. A toll road, a port, a pipeline or a dredging vessel are assets that last for decades and generate cash flows throughout that entire period. They require substantial capital to build or acquire, a patient owner willing to wait for the full payback period, and an operator with the technical expertise to run them effectively.

These are precisely the kinds of assets for which temporary shareholders or short-term funds are structurally less suitable as owners. A floating production platform off the coast of Brazil has a useful life of twenty years and generates lease income throughout that entire period. A company that owns and operates such a platform needs an owner who shares that twenty-year horizon, not someone who may already have sold his shares the day after tomorrow. The best owners of these kinds of assets are therefore the permanent-capital holding companies that have been demonstrating for a century that they have the courage and the patience to own what others only want to own until it disappoints.

What the private investor can do with this

Most private investors do not have the means to invest directly in large infrastructure assets. But they can participate in the returns that permanent capital generates by holding shares in listed holding companies built on permanent capital. Anyone who owns shares in such a holding company effectively owns a fraction of a portfolio of long-term assets managed by a team with a proven record of patient ownership and superior capital allocation.

The key, though, is that the shareholder must be patient as well. A holder of permanent capital cannot unlock all of its advantages if the shareholder sells at the first drop in the share price. The investor's time horizon and that of the company must be aligned. Anyone willing to draw that line, and to guard it, gives himself the same structural advantage that the world's best holding families have been using for generations. Anyone who would like to know more about how we apply this principle in the portfolios we manage for our clients is warmly invited to get in touch.

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Disclaimer. This article is published by Lunar Asset Management N.V. for general informational and educational purposes only. It reflects the personal views of the author at the time of writing and does not constitute investment advice, a recommendation, an offer, or a solicitation to buy or sell any security or financial instrument. References to specific companies are illustrative and should not be interpreted as buy or sell recommendations. Investing involves risk, including the possible loss of principal. Past performance is not a reliable indicator of future results. Readers should consult a qualified financial advisor before making any investment decision based on their personal circumstances. Lunar Asset Management N.V. is supervised by the Centrale Bank van Curaçao en Sint Maarten (CBCS).