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Today I'll be sharing the importance of long-term tailwinds in an investment.

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Today’s issue is brought to you by Masterworks!

LinkedIn’s “Top Startup” wants to help you hedge market volatility

Only “the best, completely game-changing ideas” made the rankings this year. One of the standouts was Masterworks, the sole investment platform on the list.

Masterworks allows users to invest in shares of investment-grade art, a $1.7 trillion alternative asset. Many of Masterworks’ members cite inflation concerns, and volatile public markets, as top reasons they invest.

It makes sense. Goldman Sachs recently reported that real assets like fine art can help protect wealth during periods of historically-high inflation. In fact, contemporary art has appreciated 13.5% annually on average, when inflation is above 3%.

So while everyone else was panic-selling at double-digit losses, Masterworks’ last 3 sales realized 10.4%, 35.0%, and 13.9%.^*  

Due to high demand, offerings can sell out in just minutes, but readers of The Dividend Growth Newsletter can skip the waitlist with this referral link.

Now for today’s piece:

The Importance Of Long-Term Tailwinds

Highlights

What Are Long-Term Industry Tailwinds?

The true rewards of dividend growth investing come from holding stocks for the long term.

If I want to hold on to an investment for decades, it's got to have long-term tailwinds.

Long-term tailwinds are external factors that positively influence an industry or business.

These external factors can be things like demographic shifts, technological advancements, and regulatory changes.

What Happens When A Business Has Long-Term Tailwinds?

For example, let’s say when you first saw the iPhone back in 2007, you thought it was going to be revolutionary.

By betting on the long-term trend that people would be using smartphones for years to come, you would’ve made a fortune (about a 3,846% return on shares bought in 2007!)

Because of these long-term tailwinds, Apple was able to take advantage of increased interest from investors and grow its market cap from $73.4 billion then to $2.8 trillion today.

Apple has also benefitted from more customers contributing more revenue which leads to more earnings. These increased earnings should lead to more buybacks and higher dividends for investors.

What If A Business Doesn’t Have Long-Term Tailwinds?

Now let’s look at what happens when a business you invest in doesn’t have long-term tailwinds.

I’ll use a stock I personally owned, the 3D printing company Nano Dimension (NASDAQ: NNDM).

Back in the late 2010s, 3D printing was all the rage. Much like a lot of new technology, it followed this pattern known as The Gardner Hype Cycle.

3D printing was set to be this revolutionary new thing, we could make anything we want and the hype exploded. Investors were very optimistic and the sentiment showed in NNDM’s stock. The stock traded as high as $95 per share in 2015.

This was the Peak of Inflated Expectations.

In the years since 2015, 3D printing has not taken off like many investors (myself included) thought it would.

If you look at the stock chart, it seems like we hit the Trough of Disillusionment in 2020 and we might be finding our way towards the Plateau of Productivity.

The 3D printing industry did not have the long-term tailwinds it needed to create valuable businesses. Businesses like Nano Dimension sounded like good investments at the time, but the hype was short-lived.

I ended up taking a loss on my investment but what I gained was valuable insight: If a business doesn’t have long-term tailwinds, it will not be successful for many years to come.

Final Thoughts

Long-term tailwinds are an important factor for investors to consider.

When a business has long-term tailwinds in its favor, it’s very likely that revenue and profits will increase over time.

Long-term tailwinds should cause the earnings of a company to grow and the stock price should follow suit and increase in value as well.

On the other hand, if the industry of a business you invest in is shrinking, the company will face significant challenges and have difficulty growing earnings over time.

This leads to lackluster returns for investors.

If you’re investing for the long haul, it’s wise to make sure the businesses you hold have tailwinds to carry them toward success.

Until next time,

Dr. “Tailwinds” Dividend

Links & Memes

Here are some of the best things I saw this week:

• The wild story of how a Saudi Arabian oil company led to the merger of LIV Golf and the PGA

• A breakdown from legend Joel Greenblatt on how the small investor can beat the market

• A thought-provoking piece from Tim Urban on how we as people might not be who we think we are

Here are some of my favorite memes from the week:

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*“Net Return" refers to the annualized internal rate of return net of all fees and costs, calculated from the offering closing date to the date the sale is consummated. IRR may not be indicative of Masterworks paintings not yet sold and past performance is not indicative of future results. See important Regulation A disclosures at masterworks.com/cd.