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Buy the option to hold long
Time as an option
Mitch Rales prefers an unlimited time horizon to an eternal one, since most things do not last forever. The power in every investment lies in the option to extend the horizon when that is the best thing for the company, when there is more to build and more to do.
Surviving to year twenty
The goal is an option on duration. Along the way, death, divorce, partners who stop getting along, and a competitor no one saw coming will all happen. A handful of businesses that make it to 20 or 30 years is enough to take care of the overall returns, and it takes only a couple to change the picture.
The right founders
The founders who suit this are the ones who keep the vast majority of their net worth in the company they are building, in an illiquid way. They are not looking for a distribution at year five, ten, or fifteen. By then the business is de-risked, and they want to double down.
Why does a longer horizon raise option value?
In standard option pricing models, such as the Black-Scholes model published in 1973, an option is worth more the longer it has to run and the more uncertain the outcome. Time gives the underlying asset more chances to move in the holder's favor, while the holder's loss stays limited. A right to keep holding is a real option of this kind. Economists apply real options reasoning to business decisions such as expanding a factory or waiting to invest.
Why do a few holdings drive most returns?
Hendrik Bessembinder of Arizona State University studied US stocks from 1926 to 2016 and found that about 4 percent of them accounted for all the net wealth creation above Treasury bills. The remaining stocks together matched the return on Treasury bills. Individual stock returns are skewed, with a few big winners and many ordinary or losing ones. The study appeared in the Journal of Financial Economics in 2018.
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