In recent months, market volatility has increased significantly, driven by shifting narratives, geopolitical uncertainties, and economic fluctuations. The fear of missing out (FOMO) can be a powerful force in investing, often leading individuals to chase trends or react impulsively to market movements. This short-term thinking can result in poor investment decisions. Today, the average holding period of a stock is less than one year as investors seek quick gains via trading. It’s crucial to remember that market volatility and hype are temporary, while a well-considered investment strategy based on patience and resilience will yield more sustainable results over time.
Recently, while explaining the Marshmallow Test to my 14-year-old daughter, I reflected on its relevance to investing. The Marshmallow Test, conducted by Walter Mischel in the late 1960s, involved giving children a choice between one marshmallow now, or two if they could wait. The study showed that those who could delay gratification often enjoyed better life outcomes. Warren Buffett captures this philosophy with the quote, “The stock market is designed to transfer money from the Active to the Patient.” This reflects the essence of the Marshmallow Test in investing. Just as children who waited for the second marshmallow benefited from their patience, investors who remain disciplined during periods of volatility are more likely to achieve lasting success. This approach also applies to businesses with the “capacity to suffer,” a term coined by famed value investor Tom Russo. These businesses are willing to forgo profits today for greater gains tomorrow. Incorporating the concept of the capacity to suffer into our investment approach means focusing on companies that can endure short-term challenges while maintaining long-term growth.
Companies with a high capacity to suffer typically exhibit:
Strong Financial Health: Robust balance sheets with low debt and ample cash reserves allow these companies to weather financial storms and continue investing in future growth.
Resilient Business Models: Firms with diversified revenue streams and essential products or services are better equipped to navigate market volatility and sustain operations.
Strategic Vision: A commitment to long-term goals, even at the expense of short-term profits, reflects the capacity to endure temporary setbacks for future success.
One company that embodies the concept of the “capacity to suffer” is CoStar Group (ticker CSGP), which is currently in our growth equity portfolio. CoStar is a leading provider of commercial real estate information, analytics, and online marketplaces, including platforms like CoStar.com, LoopNet.com, Apartments.com, and Homes.com. The company is led by its founder and CEO, Andy Florance. Over the years, Mr. Florance has built the “Bloomberg” of the commercial real estate (CRE) industry, making key acquisitions that have created a strong moat around their data services. By taking calculated risks and forgoing short-term profits, CoStar has grown into the premier information and data analytics provider for the CRE industry, with revenue up nearly twenty-fold since its IPO in 1998.
In 2014, the company bought Apartments.com for nearly $600 million, aiming to leverage its core data and operational expertise into a new vertical, the multifamily property marketplace. Despite strong revenue growth, profits plunged nearly 30% as CoStar invested heavily in improving Apartments.com. It was a challenging time to hold the shares, but for long-term investors who understood CoStar’s “capacity to suffer,” the patience paid off handsomely. The stock is now up more than 4x since that acquisition. Apartments.com is the leading online rental platform for multifamily real estate, generating more than $1 billion in revenue – up from $75 million when it was acquired.
In 2021, CoStar saw a meaningful opportunity to leverage its commercial marketplace expertise to compete in the residential market with the purchase of Homes.com for $160 million. Once again, management was willing to endure a period of profit declines in pursuit of a large potential business opportunity by pledging nearly $1 billion in investments in Homes.com. While CoStar faces strong competition from incumbents such as Zillow, it can leverage its scale and data advantage to become a formidable player in the residential real estate industry. As long-term owners of the business we are eager to see how the company will capitalize on the residential market opportunity through Homes.com in the future.
Successful investing isn’t just about spotting opportunities; it’s about having the patience and discipline to ride out tough times. CoStar Group’s story shows how long-term thinking and the willingness to endure short-term challenges can lead to significant rewards. By prioritizing companies with the capacity to suffer, we set ourselves up for long-term success. We recognize that the most favorable outcomes tend to reward those who stay patient and steadfast in their strategy through the market’s ups and downs.
Investment Commentary: Investing with the Capacity to Suffer
By Yuval Ezer, CFA®
In recent months, market volatility has increased significantly, driven by shifting narratives, geopolitical uncertainties, and economic fluctuations. The fear of missing out (FOMO) can be a powerful force in investing, often leading individuals to chase trends or react impulsively to market movements. This short-term thinking can result in poor investment decisions. Today, the average holding period of a stock is less than one year as investors seek quick gains via trading. It’s crucial to remember that market volatility and hype are temporary, while a well-considered investment strategy based on patience and resilience will yield more sustainable results over time.
Recently, while explaining the Marshmallow Test to my 14-year-old daughter, I reflected on its relevance to investing. The Marshmallow Test, conducted by Walter Mischel in the late 1960s, involved giving children a choice between one marshmallow now, or two if they could wait. The study showed that those who could delay gratification often enjoyed better life outcomes. Warren Buffett captures this philosophy with the quote, “The stock market is designed to transfer money from the Active to the Patient.” This reflects the essence of the Marshmallow Test in investing. Just as children who waited for the second marshmallow benefited from their patience, investors who remain disciplined during periods of volatility are more likely to achieve lasting success. This approach also applies to businesses with the “capacity to suffer,” a term coined by famed value investor Tom Russo. These businesses are willing to forgo profits today for greater gains tomorrow. Incorporating the concept of the capacity to suffer into our investment approach means focusing on companies that can endure short-term challenges while maintaining long-term growth.
Companies with a high capacity to suffer typically exhibit:
One company that embodies the concept of the “capacity to suffer” is CoStar Group (ticker CSGP), which is currently in our growth equity portfolio. CoStar is a leading provider of commercial real estate information, analytics, and online marketplaces, including platforms like CoStar.com, LoopNet.com, Apartments.com, and Homes.com. The company is led by its founder and CEO, Andy Florance. Over the years, Mr. Florance has built the “Bloomberg” of the commercial real estate (CRE) industry, making key acquisitions that have created a strong moat around their data services. By taking calculated risks and forgoing short-term profits, CoStar has grown into the premier information and data analytics provider for the CRE industry, with revenue up nearly twenty-fold since its IPO in 1998.
In 2014, the company bought Apartments.com for nearly $600 million, aiming to leverage its core data and operational expertise into a new vertical, the multifamily property marketplace. Despite strong revenue growth, profits plunged nearly 30% as CoStar invested heavily in improving Apartments.com. It was a challenging time to hold the shares, but for long-term investors who understood CoStar’s “capacity to suffer,” the patience paid off handsomely. The stock is now up more than 4x since that acquisition. Apartments.com is the leading online rental platform for multifamily real estate, generating more than $1 billion in revenue – up from $75 million when it was acquired.
In 2021, CoStar saw a meaningful opportunity to leverage its commercial marketplace expertise to compete in the residential market with the purchase of Homes.com for $160 million. Once again, management was willing to endure a period of profit declines in pursuit of a large potential business opportunity by pledging nearly $1 billion in investments in Homes.com. While CoStar faces strong competition from incumbents such as Zillow, it can leverage its scale and data advantage to become a formidable player in the residential real estate industry. As long-term owners of the business we are eager to see how the company will capitalize on the residential market opportunity through Homes.com in the future.
Successful investing isn’t just about spotting opportunities; it’s about having the patience and discipline to ride out tough times. CoStar Group’s story shows how long-term thinking and the willingness to endure short-term challenges can lead to significant rewards. By prioritizing companies with the capacity to suffer, we set ourselves up for long-term success. We recognize that the most favorable outcomes tend to reward those who stay patient and steadfast in their strategy through the market’s ups and downs.
Shannon DermodyTEST