Roger McNamee on "time horizons"

Here's a thought-provoking video of venture and private equity investor Roger McNamee being interviewed a few months ago and discussing some of the things that he looks for in an investment. 

As interviewer Emily Chang brings up beginning at 10:15 in the video, Mr. McNamee is a very focused investor -- his first fund at Elevation Partners had $1.9 billion in assets and invested in only eight private companies.  He calls diversification "the bane" and argues that "it minimizes your returns and it raises your risk."

While this is contrary to the conventional wisdom most investors have heard from Wall Street and the financial media, it is actually a point we agree with and one we have written about in the past (see for example the post on "Deworsification").

Another important subject Mr. McNamee touches on can be found in the discussion that begins at around 15:00 in the video.  While he is ostensibly discussing the development of negotiated buyers and sellers of private (not listed) shares in a company that has not yet gone public, the general heading that we would put on this discussion would be "time horizons."  

The subject of time horizons for the investor is extremely important.  In his discussion at this point, Mr. McNamee explains that there were venture investors who were pushing for a sale of Facebook at a valuation of about $1 billion, when the company was still private, and were only over-ruled in this effort by the veto of CEO Mark Zuckerberg (this discussion takes place around 15:26)*. 

Mr. McNamee notes that negotiated private sales enabled those investors who wanted to sell to do so, and buyers (in this case Mr. McNamee's fund and another fund) to buy, which had the effect of moving "a lot of that stock into the hands of people whose time horizons were much closer to the management team."  In other words, he means the new investors had an investment horizon that corresponded more closely to the longer-term horizons of the management team, not the shorter-term time horizons of the venture investors who wanted a payout now and were less interested in the future of the business.

This is a critical point for investors to consider, and one we have written about many times in the past (see for example the post entitled "Wise words from Reid Hoffman").  While investors may not always have the opportunity to invest in innovative private businesses, and while even those who do may not wish to do so with all of their investment capital, it is at least important to "think like a private investor" in some ways, and particularly like the type of private investor that Mr. McNamee is describing who has a longer-term horizon focused on the business success, and not the shorter-term horizon focused on getting a quick return or payback.

The biggest problem with the landscape of Wall Street is that it is increasingly dominated by a short-term mindset interested in quarter-to-quarter time-frames (and even shorter periods than that, down to day-to-day or even minute-to-minute).  Investors of all levels have not helped this environment either, as the mindset of investing for many years has become more rare.  The decrease in a longer-term focus is somewhat understandable, given the constant short-term focus of most of the commentary coming out of  both Wall Street and the financial media since the dawn of the 24-hour news cycle.

The key distinction we believe that investors should take away is that between a focus on business and a focus on markets.  We believe that Mr. McNamee's comments reveal an intense focus on business, and that he brings out some of the real problems with the short-term market focus that prevails in many parts of the investing world today. 

By carefully considering these insights, investors can put themselves in the position to benefit from widespread short-term focus, just as Mr. McNamee and his fund were able to benefit by purchasing shares from those whose time horizons were much shorter, in the illustration that he cited above. 

* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Facebook (FB).