Why investors often die in the valley between a good idea and the payoff

The Oklahoma City Thunder came out of nowhere to go to the NBA finals in 2012. Unfortunately, this small-market franchise couldn’t keep its three superstars (Kevin Durant, Russell Westbrook and James Harden) and the team was gradually dismantled. In exchange for the stars, the Thunder acquired a slew of future draft picks.

If you’re wondering how this relates to investing, just wait. The story illustrates the lag effect that investors face on a regular basis.

At this point, the Thunder had a treasure trove of opportunity, but as in any sport, it wasn’t certain they could cash in. But after using their draft choices wisely and being really bad for a few years, a deep, young team emerged. The Thunder won the championship in 2025.

Managing through valleys of ambiguity is what makes investing so interesting, and so difficult for casual participants to understand. During the time lag between potential and outcome, predictors of success are unreliable (or totally fabricated), and there are no guarantees (plenty of teams in the Thunder’s situation tried to rebuild and failed).

And there’s another harsh reality when making investment predictions: If you’re too early, you’re wrong.

Cyclical industries provide a steady stream of these valleys. Too much capital investment and investor enthusiasm (or too little) tip off veterans like me to what’s ahead, although the timing and magnitude are impossible to predict. As Mark Twain said, “history doesn’t repeat itself, but it often rhymes.”

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Right now, there are some particularly interesting examples of the lag effect.

Rates and economy

There’s been a steady chorus from economists and commentators about how the U.S. economy is staying strong despite rising interest rates. They use backward-looking data to make their case without acknowledging the lag effect.

Those data points will indeed reveal how the economy handles higher borrowing costs, but it will be six to 12 months from now. Higher rates in an economy that’s so dependent on debt will undoubtedly dampen consumer spending and housing movement; we just don’t know when, by how much and for how long.

In a similar vein, increased energy costs aren’t yet showing up in the economic numbers but they too will be felt, failing an end to the war in the Middle East.

Debt and government programs

The mother of all time lags is the delayed impact that rising sovereign debt levels will have on governments’ ability to maintain programs and make interest payments.

This has become a hot topic in fixed-income markets, although concerns about Western governments hitting a fiscal wall have come and gone numerous times over the past few decades (remember, too early equals wrong). Nonetheless, the numbers are worse than they’ve ever been, and investors are starting to ask how high bond yields will need to go to fund government largesse. How long can governments use their credit cards to balance their budgets?

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AI’s profitability gap

The most important valley to navigate right now relates to artificial intelligence. The technology is tantalizing, but we don’t yet know what the revenue models will look like and who the winners will be. Profitability always seems to be a long way off.

A profitable exit from the spending binge can certainly happen. I think back to when Facebook (now part of Meta) went public. It was generating losses but quickly turned into a money machine. Google (now part of Alphabet) was similar.

Needless to say, getting AI right will have a huge impact on investment returns.

Minding the gap

To be clear, investing is all about flying blind. You can never have all the facts. If you wait for certainty, you’ve missed the opportunity.

Some time lags are easier to navigate. The outcomes are reasonably certain; it’s just the specifics that are in question. The effect of interest rates and oil prices on the economy fit this category. Others, like AI, are more difficult. The newness of the technology means there’s no tune to rhyme with. And then there are some like the government debt buildup that are just excruciatingly long.

Combined, they’re what makes investing so interesting and challenging, and why I never put a time stamp on any prediction.

Tom Bradley is a portfolio manager with Purpose Investments, co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.