When is the best time to invest, specifically when it comes to angel investing into startups? Or is better to just ignore timing and invest when businesses with potential to change people’s lives appear? In modern day society, the financial markets and economy tend to have cycles, ranging from short term ~10 year up and down cycles, with larger 50–100-year cycles. For more see Ray Dalio’s work on economic cycles.
Interest rates during these cycles will also vary, sometimes becoming quite low, and at other times, becoming quite high. In times where interest rates are low for an extended period, more money in the total overall money supply, M1, M2 or otherwise occurs. This makes for more money chasing fewer number of companies, with valuations increasing. During times where interest rates are high for an extended period, the total money supply starts to dry up and credit is not handed out easily. So, there will be less money to be invested in the companies remaining, with valuations decreasing. In those credit crunch periods, companies that normally are more than funded may need to seek additional funding, and this presents average joe non-accredited investors to get into companies that might not otherwise have been available. Looking at the timing in an economic cycle, it would appear that when it is difficult for companies to raise money, access to credit is not as easy as before, it presents investors with lower valuations, and simultaneously, better companies that might not have normally been available. During downturns in the economy, when it is raining gold outside, is the best time to get the buckets out to collect. But there’s something else that’s even better than downturns.
Investing in the best founders, products, product market fit, aka investing in the best companies is better than trying to time the market. Early investors in Uber in 2009 made 5000–6000x there money 10 years later at the 2019 IPO. Even if some made 3000–4000x by trying to time the market, they still got into a great company and made a fortune. If you’ve picked great companies that fundamentally disrupt industries or create entirely new industries that better a large amount of people’s lives, does it matter to time the market? A lot of money was made either way. Always having cash for good opportunities, or for prudent purposes as an emergency fund makes a lot of sense. But imagine waiting years on end trying to time the “perfect” opportunity, only to see asset prices of solid startups increase significantly on each future raise round from explosive customer adoption, market share gains, and revenue growth. It is much more valuable from an investment standpoint to be able to identify great businesses than to time businesses. Otherwise, it just leads to timing mediocre businesses, which are aplenty. As Charlie Munger would say, “Our objective is to identify significant concepts as they emerge, given their infrequent occurrence. Opportunity presents itself to those who have prepared their minds”.
Beyond finding the right businesses to buy, there is yet another skillset that if not had, will unravel all future significant gains. This quality is increasingly diminishing in a fast-paced world led by instant gratification: patience. Society has now been setup to allow people to have impatience as everything can happen immediately. Need something? Buy on amazon, next day delivery with Prime. Don’t know something? Don’t find it in a book at the library, google it in 10 seconds. Want to watch something? Go on Netflix and have something playing in 10 seconds. This instantaneous result goes with our human nature, but is very bad for investing returns. Consistently being invested in the market yields better results than trying to perfectly time market movements. As indicated above, Uber took 10 years to go public; it wasn’t an overnight success. Overnight successes in reality were years and decades of work behind the scenes and then are simply portrayed that way. Because that is what is popular and appeals to people’s inner desires. However, the big money is not in the buying, and the selling, but in the waiting; Charlie Munger. This will become even more important in the future when equity crowdfunding will mature and secondary markets will be created for investors to be able to buy and sell even privately held securities. This could be dangerous to long-term financial health. Selling because the sucker suddenly went up a bunch, or to fulfill a life related obligation, may feel good in the short-term, but could really hurt in the long run. Imagine passing up the 5000x gain in Uber and selling early when it went up a few times to be able to buy a brand-new car because the old guzzler is dying and broken beyond repair. That brand new car would have cost more than just a few tens of thousands, but a few millions.
Disclaimer
This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.