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The Long Buy

avc.com

52 pointstosh17 comments

> 2/ You get to build a blended purchase price which is less dependent on the circumstances of a particular moment in time.

This is essentially Dollar Cost Averaging... which is a recommended approach when you psychologically fear the risk of lump sum investments (though, lump sum investments are expected to have a higher return than DCA, at least in the case of index fund investing)

https://en.wikipedia.org/wiki/Dollar_cost_averaging

The underlying logic for Lump Sum in an index is that the index is tracking the broader economy, which "always" goes up over the long haul. That same logic doesn't apply for a single company, where idiosyncratic risk will quite likely swamp the effects of the slowly rising tide of the broader economy.

I would guess you probably get better valuations in the early rounds, but have less risk of loss in the later rounds. If nothing else, survivorship bias is playing in your favor for the later rounds (ie, the company has at least survived long enough to reach a Series B, C, D, etc round).

I don't think this is always true. You could believe that something like Bitcoin is a good investment over a 10-year term, but recognize that it's volatile in the short-term, and so want to dollar-cost-average for that reason, regardless of what you think the broader economy might do. Some might even see it as a hedge against the rest of the economy.

> There are not that many asset classes where the manager has a pool of long term locked up capital and the opportunity (and the right) to invest again and again in a company.

This is something that you can do easily in your private portfolio. "Buy when there's blood in the streets, even if the blood is your own". This, of course, requires a decent reserve of cash/high quality bonds.

Not many asset managers are willing (or rather able, due to client pressure) to hold un-invested assets.

It's not smarts, but disciplined will-power and clear-sightedness, that's the determinant of any game played for long enough to span enough crises. Many ambitious startups in that category.

I'm dreaming, but it would be nice to see some numbers.

What would Union Square's performance have been if they just invested a max of once in each company? Twice? Instead of this N times strategy? I wonder the same about YC.

I think the strategy he's talk about is simply called Dollar Cost Averaging (https://en.wikipedia.org/wiki/Dollar_cost_averaging) in the public markets. I do it. It works and because there's data available it's easy to see.

I haven't seen anyone put out numbers yet on how important it is in angel/seed/VC investing.

My back of the envelope guess is that unless you follow this strategy (doubling down on your winners 3-5 times before liquidity) it's not worth it to do early stage investing, but I'm not sure. Would love to see some data.

Edit: Actually, looking up DCA its meaning is a bit more specific than I realized and not quite a strategy that I follow. I meant more about doubling down on your (expected) winners particularly when their price falls irrationally. Half-baked analogy.

I believe that I've read an analysis of something just like what you ask from Fred/AVC some years ago, so perhaps it's worth looking at the archive. I don't recall the exact details, but it was roughly that each of the successive stages got (obviously) a much lower rate of return, but since the successive stages were much larger and much less risky, most of the actual money returned came after the initial stage.

However, perhaps it's worth thinking more about what does it mean to 'worth to do early stage investing' - if you would just do early stage financing, then you'd have much lower returns but also much smaller fund size. Is getting a higher rate of return the top priority, or is it better to get more total return by leveraging more money despite a lower relative rate?

> I meant more about doubling down on your (expected) winners particularly when their price falls irrationally

You can't really know if the price fell irrationally. Maybe its just you misinterpreting the available data.

The data is pretty clear, holding cash in case the market drops costs you more than a possible crash.

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves"

This is an iconic quote that captures that sentiment.

I agree that it’s a worse strategy if you hold capital back.

I was looking for a comparable in public equities where you keep buying more of the same thing, doubling down on the bets you know and like. I guess in private markets you are limited by the available supply. In Public markets you are limited by your capital.

For me when I get more capital I will deploy generally in things I already own, which has the affect of lowering average price if the price has fallen(that’s why I made a mistake calling this DCA).

I mean today it is very easy to hold the whole market, so why take on idiosyncratic risk that doesn't have a positive expected return when you can just the whole market and maybe some factor premiums?

The price you bought it is irrelevant, all that matters is the current value of the security. If you have capital, it is always the best decision to put it in the market as soon as possible.

Still, whole-market investing should not be regarded as riskless. It takes ten to thirty years before it goes from "usually a good idea" to "virtually always a good idea."

For passive investing that’s the Way to go. But I am an active investor And put time into helping my companies whether big or small. I like to have a thesis And invest on that. I also would be willing to underperform a Certain percentage if it Was in service of companies that I think are building a better world. Though FWIW have beaten vfinx easily past 5 years.

During the last years one could easily have outperformed it with spxl

Wow I get the risk of that but still cool to see that performance :)

I guess "long buy" is a great strategy for the government's "long spend", "long debt", "long bonds", and "long whatever just blew out".

Where does all this wind up?

So #2 doesn't seem valid. Your purchase price is a direct reflection of global central bank's policies, meaning... it's only going up as currencies go down.

This seems like a dangerous justification for the sunk cost fallacy. If you get in early on an investment, you become partial to the company based on the relationships you have created and your understanding of the market. Although that might allow you to have a better investment criteria for a following round, you could posit the question of whether another investment opportunity is the more sound choice.

On the topic of dollar cost averaging, you are reducing your risk within the investment based on timing but that is too much of a micro level view of the power and value of the investment dollar.

The host is down, here is the page on the Wayback Machine:

https://web.archive.org/web/20200203194541/https://avc.com/2...

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