Investing in time. A note on investing and delayed gratification

One of the essential principles repeatedly cited by many exceptional investors such as Howard Marks, Warren Buffet, Charlie Munger, Seth Klarman and their likes is the idea of delayed gratification. Delayed gratification refers to avoiding an otherwise desirable/tempting decision in the short run for a more lucrative one in the long run.

The argument put forth by investors for decades is to keep delaying your payout as the aphorism ‘slow and steady wins the race, derived from Aesop’s fable of the tortoise and the hare.

The consensus among these reputable investors is that sizeable returns while investing come from opportunities which do not pay off in the short run. On multiple occasions, Mr. Buffet, a stalwart in the field of investing, has put his words into practice.

Over a few decades, he and Mr. Munger have made exceptional investments through their investment vehicle Berkshire Hathaway under the promise of delayed gratification. However, there has recently been a chatter about whether delayed gratification is a tenable investment strategy.

The primary justification as to why it may no longer hold is that interest- rate cycles have moved to favour positive real interest rates, presently driving up the discounting rate.

Therefore, the valuation of companies whose business model revolves around burning cash initially such as Swiggy or Zomato, may take a hit at higher discount rates.

Moreover, the argument goes on to state delayed gratification does not apply to investing as well anymore because the existence of such businesses is due to the low-interest rate regime driving down the cost of capital.

However, one must realise that such investing stretches far beyond the narrow scope of venture- capital funds and seed fund-burning start-ups.

Out-of-favour assets

The broader and more reliable application of delayed gratification in investing, which is buying out-of-favour assets at a lower price than their intrinsic value, is immune to the specific macroeconomic conditions of the period.

It has worked in the positive real interest rate period of Benjamin Graham (the father of value investing) as well as that of the ultra-loose monetary policy era of the present.

In this scenario, the fundamental idea behind delayed gratification is to favour two birds in the bush rather than the one in hand, regardless of the discount rate if one is meticulous in analysis.

Contrarian investing

The rationale surrounding this lies in what Mr. Marks states as contrarian investing. Contrarian investing involves picking stocks of companies the market has shunned excessively, leading to them trading below their intrinsic value.

The market tends to correct the difference between actual price and intrinsic value over time, leading to superior returns for those willing to wait during the period.

Calculating a company’s intrinsic value is not an exact science but can lead to lucrative profits when done well.

Mr. Buffet’s investment in Coca-Cola reflects the principle of delayed payoffs well. In the 1980s, the stock market was recovering from the Black Monday crash of 1987. Against this backdrop, Mr. Buffett began eyeing The Coca-Cola Company.

Coca-Cola had been facing challenges, including the infamous ‘New Coke’ debacle in 1985, where the company tried to introduce a new formula for its flagship beverage, only to face a significant consumer backlash. In 1988, Mr. Buffett started purchasing Coca-Cola shares through his holding company Berkshire Hathaway. By the end of the year, he had acquired about 6.2% of the company for roughly $1 billion, making it one of his most significant equity investments. Berkshire’s holdings of Coca-Cola are currently valued at $25 billion, which would pin the compounded annual growth rate (CAGR) of his investment just below 10%.

However, this excludes dividends from a company with a reputation for consistently increasing its dividend payout yearly for decades. The CAGR of his investment soars well past 12-13% when one factors in dividends and compounds it. The returns were made when the interest rate (discount rate) was well above the inflation rate.

The timeless principle of delayed gratification transcends economic cycles, proving its merit from Mr. Graham’s era to modern times with investors like Mr. Buffett.

Despite changing market dynamics, patient, value-driven investing consistently yields rewards. In an age of instant results, recognising long-term value remains the cornerstone of astute investing.

Whether in high or low-interest rate environments, the wisdom of waiting for a more substantial future reward continues to resonate, exemplifying the adage ‘good things come to those who wait.’

(Anand Srinivasan is a consultant and Sashwath Swaminathan is a research assistant at Aionion investment services)