Although I'm well-known as a permabear (which, given the past four years, is synonymous with blithering idiot), the three biggest profits I've made in my live have all been from "long" positions.
I put long in quotes because these are not trades of public stocks.
The first of these is my house in Palo Alto, which I bought more than twenty years ago. At the time, I was told it was the biggest mistake of my entire life, and in the year that followed, as I saw its value fall by 20%, it seemed that perhaps the naysayers were right. Suffice it to say that now I'm one of those guys who has been in the same place for so long that the price I paid for it seems science-fiction cheap these days. I could never afford to live in such a nice place if I had to buy into the current market. Of course, I have stuck with this "long" position because, well, it's where my family lives, and we have no reason to go anywhere else. Having a very low and permanent tax base doesn't hurt either (Proposition 13 in California basically means two neighbors living in identical houses can pay vastly different property taxes each year, depending on their purchase price).
The second of these was my business, Prophet. This company was no overnight success story. It took thirteen years of many ups and downs before it finally paid off, and it flirted with going out of business at least once. But I'm persistent and stubborn, and my desire to create the business and its products was very strong, so I finally saw it through to the end, when we sold it in January 2005.
And it is that sale which brings me to the third and most important "long" and the one which compelled me to write this post.
After the sale of Prophet, I had a lot of extra cash, and I allocated it to various purposes and investments. One particular opportunity came to my attention, which was a venture investment in a software start-up (I'm not going to reveal the name, but you've probably never heard of it). The company had raised money at a valuation of $10 million, but one of the shareholders wanted to sell his stake (which represented 5% of the firm), and he did so at a discount of 30%, giving the firm a "market cap" of $7 million. So now I had a meaningful stake in a startup.
I had never made a venture investment of any kind before, and I thought it was pretty cool that I still had an interest in a small company, now that I was divested of Prophet.
Soon after I made the purchase, I was at a social event, and I proudly told an acquaintance (who himself was involved in venture capital) about my investment. He immediately told me, "you should probably assume you're going to lose 100% of your capital." I guess he meant the advice as well-meaning, but it sure burst my balloon.
The thing is, the company really did struggle for a while. I had bought the stock in 2005, but a year later, it seemed questionable whether the company was going to survive at all. I started to think I had made a really huge mistake, but as you can guess, the market for private stock – – particularly of a stumbling startup – – is just about nil. My stake really was worth $0, effectively.
The firm managed to limp along through 2008, 2009, 2010……..and gradually began to actually build a real business. I would drop hints from time to time about my interest in selling my stake to any interested parties. There was never so much as even a nibble, but I'm sure I would have gladly sold my stock for $100,000, and I paid $350,000 for it in the first place. I just wanted out, and I would consider myself lucky to get any meaningful amount of cash back.
Fast forward to the present day. I did sell stock. I got all my money back. And a very handsome profit. And here's the best part of all – – – I still own the vast majority of the stock, since I only had to sell off a fraction of my holdings to get my investment and a nice profit back. So at this point, it's "house money", and obviously I'm in a vastly superior frame of mind, since I'll cheerfully hold on to what I have left as it continues to grow (the company in question is thriving now).
So what's the point of this? Well, the point is one that doesn't reflect well on me at all – – – given the opportunity, I would have dumped for a big loss something which a couple of years later was worth millions. I would have chickened out based on a combination of fear and impatience.
Does this sound familiar? I think this one-two punch of fear and impatience is what chases most people out of positions that, in the end, really blossom. How many people who paid $6 per share for Apple have held on to it consistently to this day? I'd guess approximately zero.
So by having no choice – – – by not being able to get out for one reason or another (be it my house, my business, or my venture investment) I have been forced into being a bull, and it's worked out in all three cases. Since I'm apparently psychotic, I still focus on the bear side of things when it comes to the public markets, but that's probably the subject of extensive psychoanalysis for which I don't have time here.