There is an old story about Hubert Lyautey, a French army marshal, elder statesman and former administrator of the French colony of Morocco. In the story, Lyautey goes to his gardener one day and asks him to plant a certain type of tree in the back garden of his chateau. The gardener objected, knowing the tree grew at a remarkably slow pace and that it wouldn’t flower for at least a century. “In that case,” Lyautey replied, “there is no time to lose. Plant it this afternoon.”
Time is multidimensional
The concept of time – and how you use it – is of vital importance to the value investor. Time can be multidimensional. An investor can use their time to research an investment opportunity or read an investment classic to help further develop their investment strategy. This use of time provides no direct value to the concept of time value of money, whereas time can be directly applied to this theory by investing and holding a company's stock for 20 rather than 30 years. Seen through the eyes of our French marshal, one use of time would have been researching and making a decision on a type of tree to plant. Another possible use of his time might be taking (starting that afternoon) every moment available to him to get better – and faster – returns on his decision. As a value investor, I would humbly suggest the marshal had it right when he emphasized time spent putting your asset to work is more important than the time it takes in picking the type of asset itself.
That doesn’t mean an investor should randomly choose any old asset to purchase and then sit and wait 30 years for it to produce value. Rather, I am suggesting that the preponderance of time should be spent letting it work its wonders in value creation, while much less time should be spent on the characteristics of the asset and decision process in selection. For instance, Lyautey may have chosen his tree for the flower or scent it generated (this seems logical since the gardener stressed the time to flowering). It would seem logical the marshal would spend far less time thinking about the type of tree (say a non-flowering elm versus a flowering dogwood) than in the time to letting the tree grow to maturation.
A value investor should be no different than our good marshal. Should the investor spend several years deciding whether a real estate investment trust stock or a large-cap technology dividend stock be a better portfolio holding or should they make a quick, well-reasoned decision and then let time generate dividends and stock price appreciation?
A working example
A company I invested in when I was at Dorfman Value Investments (and that remains in my personal portfolio at Nintai Investments LLC) is iRadimed (IRMD, Financial). iRadimed engages in developing, manufacturing, marketing and distributing magnetic resonance imaging-compatible products such as IV pumps and other electronic equipment. As the only manufacturer of IV pumps than can be used safely in an MRI environment, the company provides enormous benefits to hospital patients receiving IV drugs who need to get an MRI.
Essentially, an enormous magnet or any pump with a metallic component can capably create a terrible accident within the MRI imaging center. Pumps with any metallic parts require the pump to be outside the imaging room, which requires either disconnecting the pump and stopping treatment or running a 75 to 100-foot extension tubing to the pump outside the room. Neither are safe or recommended solutions. iRadimed's equipment requires none of these workarounds and can be placed directly adjacent to the machine.
iRadimed is a long-term play on the growth of MRI imaging over the next decade. With an estimated growth rate of roughly 4-6%, the imaging market might seem like a slow-growth industry. The company's technology (both the MRI-compliant IV pump and data box) currently represents only 27% of imaging units at Tier 1 and 2 hospitals. Penetration is even less among smaller hospitals. By using a razor or blade model, the company is building a base of steady revenue over time. A final gem is that iRadimed is the only Food and Drug Administration-approved solution, granting an exclusive monopoly for years to come.
In this instance, we are faced with a similar problem facing the marshal and his backyard tree. First, is the company an investment that meets our criteria? Is it a company that has criteria we are specifically looking for in an investment? Second, if iRadimed turns out to be a company that both merits our consideration and meets our purchasing requirements, how important is time in both when to purchase as well as the length to hold it in the portfolio, and how this could impact our investment returns?
Approaching these issues, I generally think of time in four separate ways.
A well-developed process saves time: Having a well-developed selection process allowed the team to identify iRadimed as a potential investment quite quickly. It had no short or long-term debt, $31.2 million in cash on the balance sheet and generated $4.9 million in free cash flow. The company’s 39% return on capital far outweighed its 13.7% weighted average cost of capital. The company converted 17% of revenue into free cash and generated mid-20s return on equity. The stock traded at a 28% discount to our estimated intrinsic value. After spending roughly 60 days working diligently to identify the source of the company’s moat, its competitive position (easy, it had none), we knew we had a gem of a business that we could safely hold until at least 2024 (or eight years from date of purchase) and probably much longer knowing that development and FDA approval processes can take up to six or seven years.
Time as a compounder beats selection nearly every time: We knew that even if our selection process and research methodology were wrong, the time value of money meant compounding over the period we were looking at (eight to 14-year holding period) would likely beat the selection process each time. If your initial selection process is solid, the power of compounding time can frequently (but certainly not always) beat out any failure in your selection process.
You never gain time back, you only give it away: Every moment we weren’t holders of iRadimed stock was a period of time we were giving away an FDA-mandated monopoly and hospital acceptance of a new technological innovation. Every month we spent on the sidelines was a month we would never get back from a competitive position, customer position and innovation position.
Time heals many, many mistakes: In the few months after our initial stake was purchased, the share price dropped by roughly 30%. This was due to the fact iRadimed’s only competition had gone bankrupt several years before and the boost in sales as it captured these customers was winding down. In our models, we knew a 10-year holding period would smooth out these numbers and 15 years would make them look nearly non-existent. Within 24 months, the position had doubled in price.
Some lessons
Whether investors realize it or not (and certainly most professional investment managers do not), investors allocate not just capital, but they also invest time. In many cases, investors generate a negative return on their time. They do this in several ways.
Most investors fail to see time as a commodity: Time spent on the investment process – everything from stock research to writing annual reports to meeting Securities and Exchange Commission and state regulatory requirements – uses the commodity of time. How it used, how you decide whose time will be used and your ability to use it wisely is no different than deciding on what marketing mix works best or how much capital to allocate to industry conferences. Time goes by no matter what you do or say, so use it like any other commodity – wisely, efficiently and cost effectively.
They fail to measure return on their time: I was guilty of this when I first started in the investment process when I starting investing Nintai Partner’s internal profits. I couldn’t tell you how much time I had spent on researching Company X, which returned 25% annually over 15 years, or how much time I had spent researching Company Y, which lost 5% annually over eight years. The one thing I can almost assure you is that you will spend far more time on your losers than your winners.
The ability to do nothing is sometimes the most effective use of time: When one looks at modern investing – whether it be individual investors or institutional investors – many think activity (usually with an emphasis on trading) is the most effective use of time. In fact, many fund managers with low turnover will openly tell you about calls they receive from investors who tell them they don’t pay them to sit and play tiddlywinks. I’ve found in my career, time spent reading up on holdings or improving my process far outweighs turning over my entire portfolio each year.Â
Many investors think of time as a lineal tool – something to either take advantage of ("You may delay, but time will not, and lost time is never found again”) or to try to avoid (“The two rules of procrastination: 1) Do it today. 2) Tomorrow will be today tomorrow.”). Yet time is far more complex than that. Time is a commodity and assets no different than dollars (after all, there is even a phrase for that – “time is money”). Decisions have to be made about what to give up, when to give it up and at what consequences. Alternatively, when using time as an asset, we have to consider what other assets are given up and when that might happen. I have found those investors who find a way to devise a process in which to see time as an asset, how to allocate it and understand the costs of those decisions are generally more successful value investors than others.
In my final segment on thinking differently, I’m going to take a look at how some of the best investors learn how to think about thinking in a different light – how to achieve better use of it, what successful thinking means and how one applies it. Until then, I look forward to your thoughts and comments.
Disclosure: I own shares of iRadimed in my personal account at Nintai Investments LLC.
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