“How to Overcome our Inner Investment Limitations”
A Permanent Capital structure, without its daily quotes, liquidity, and Behavior Gap will lead to better long-term compounded returns for most people.
Over the long run, the stock market returns between 8% and 10% per year. The average stock market investor does far worse. Why? The Behavior Gap.
The Behavior Gap is the gap between investment returns and investor returns.
An investment’s returns are calculated from its start to its end.
An investor’s returns are calculated from purchase to sale and include all the purchases and sales made during the life of the investment.
The stock market, with its daily quotes and liquidity, provides ample opportunity for fear, greed, buying, and selling. This combination is what leads to investors underperforming their investments.
I am a proponent of investing in the stock market. I invest the same amount of money into an SP500 index fund every month. I do not even think about it. That way I eliminate the behavior gap.
But for most, the temptation is strong to buy more at the top when everyone around them cannot stop talking about their investment returns and sell at the bottom when fear is ever present.
A permanent capital structure, with its long time horizon, lack of daily price quotes, and less frequent liquidity windows will allow the benefits of compounding to work. Warren Buffett made 90% of his money after his 65th birthday. He is a great investor, probably the best ever. But he did not make his money simply by having some great yearly returns. He continuously compounded for decade upon decade.