Patient Capital: The Key to Long-Term Wealth Creation
Patient capital is the secret sauce to building wealth over the long term, standing in stark contrast to the rapid trading and speculation that characterizes much of today’s investment landscape. Essentially, once you’ve saved up about six months of living expenses, hoarding additional cash doesn’t do much good. This is known as “cash drag,” because historically, the returns on cash have lagged behind other assets like stocks, bonds, and real estate.
Understanding Patient Capital
Patient capital isn’t just about being patient; it’s about identifying long-term trends and investing in assets that capitalize on these trends. For instance, when I moved to San Francisco from Manhattan in 2001, I noticed the real estate was relatively affordable compared to Manhattan, yet the salaries were similar. Seizing this opportunity, I invested in several properties over the years, betting on the city’s growth, which paid off handsomely.
The essence of patient capital is holding onto investments for the long haul, often a decade or longer, to realize substantial returns. This approach contrasts sharply with the fleeting excitement of a quick stock flip that might result from market hype but doesn’t necessarily lead to sustainable wealth.
Benefits of Patient Capital
Patient capital typically encompasses investments in areas like real estate, private equity, and other less liquid assets. This investment style is favored by the world’s wealthiest and largest institutional funds because it minimizes the temptation to sell during market dips and maximizes returns over longer periods.
For instance, consider the Yale Endowment Fund, which has significantly outperformed traditional stocks and bonds by focusing over 90% of its assets on patient capital investments. These investments often involve less competition and potential for arbitrage, providing a unique edge in the market.
Illiquidity Premium
A foundational study by Michael Jensen of Harvard University highlighted that private companies often exhibit better alignment between owners and managers compared to public companies, which tend to hold excessive cash. This alignment in private firms leads to more efficient operations and better returns, a concept known as the “illiquidity premium.”
In today’s market, technology and innovative platforms allow everyday investors access to private markets through vehicles like the Innovation Fund, which invests in high-growth areas such as AI and machine learning. For me personally, building a substantial investment in AI through platforms that require minimal initial investment is a strategic move to ensure my portfolio is well-positioned for future growth.
Invest More, Worry Less About Liquidity
If you aspire to build wealth, the strategy is straightforward: think and act like the wealthy. This means investing aggressively and maintaining a minimal cash reserve to avoid unnecessary spending and optimize investment growth. High liquidity can often lead to poor financial decisions because the availability of cash makes it easier to spend impulsively.
Investing heavily in less liquid assets, like real estate, forces financial discipline. Real estate not only provides a stable investment but also generates income, making it one of my preferred methods for building long-term wealth. Over time, as you pay down property debt and potentially benefit from rental increases and property appreciation, your equity grows significantly.
Embracing Patient Capital Through Real Estate
Real estate is an ideal vehicle for patient capital. It’s tangible, generally less volatile than stocks, and provides practical utility while generating income. This makes it easier to hold through market fluctuations, which aligns perfectly with the concept of patient capital.
For those interested in diversifying their real estate investments without direct management, platforms like Fundrise and CrowdStreet offer access to various real estate investments, catering to both accredited and non-accredited investors. These platforms facilitate investment in geographically diverse properties, potentially offering higher yields and growth due to demographic and economic trends in those areas.
In conclusion, embracing patient capital through strategic long-term investments in less liquid assets like real estate and private companies is a proven path to significant wealth accumulation. By aligning your investment strategy with these principles, you can build a portfolio that not only withstands the test of time but also provides substantial returns.
