Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

CHAPTER 22

THE HOLY GRAIL OF LONG-TERM VALUE INVESTING

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return [emphasis added]. The worst business to own is one that must, or will, do the opposite—that is, consistently employ ever-greater amounts of capital at very low rates of return. —Warren Buffett

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.2

“The single most important decision in evaluating a business is pricing power [emphasis added]. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”6

investors.”9

We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year. —Charlie Munger

Capital Allocation

CHAPTER 23

THE MARKET IS EFFICIENT MOST, BUT NOT ALL, OF THE TIME

CHAPTER 24

THE DYNAMIC ART OF PORTFOLIO MANAGEMENT AND INDIVIDUAL POSITION SIZING

The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. —Charlie Munger

The appeal of a concentrated portfolio is that it is the only chance an investor has to beat the averages by a noteworthy margin. —Frank Martin

Statistical analysis shows that security-specific risk is adequately diversified after fourteen names in different industries, and the incremental benefit of each additional holding is negligible. —Mason Hawkins

Two things should be remembered, after purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and overall market risk will not be eliminated merely by adding more stocks to your portfolio. —Joel Greenblatt

I decided to run a concentrated portfolio. As Joel Greenblatt pointed out, holding eight stocks eliminates 81 percent of the risk in owning just one stock, and holding thirty-two stocks eliminates 96 percent of the risk. Th...

We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. —Warren Buffett

CHAPTER 26

READ MORE HISTORY AND FEWER FORECASTS

Progress happens too slowly to notice; setbacks happen too quickly to ignore. —Morgan Housel

Whatever methods you use to pick stocks, your success will depend on your ability to ignore the worries of the world long enough to allow your stocks to succeed. No matter how intelligent you are, it isn’t the head but the stomach that will determine your fate. —Peter Lynch

Fear has a greater grasp on human action than does the impressive weight of historical evidence. —Jeremy Siegel

More money has been lost trying to anticipate and protect from corrections than actually in them. —Peter Lynch

“The average annual return on equities from 1926 to 1987 was 9.44 percent. But if you had gone to cash and missed the best 50 of those 744 months, you would have missed all of the return.

CHAPTER 27

UPDATING OUR BELIEFS IN LIGHT OF NEW EVIDENCE

CHAPTER 28

LIFE IS A SERIES OF OPPORTUNITY COSTS

CHAPTER 29

PATTERN RECOGNITION

Just as animals flourish in niches, people who specialize in some narrow niche can do very well. —Charlie Munger

CONCLUSION: UNDERSTANDING THE TRUE ESSENCE OF COMPOUNDING

Life is like a snowball. The important thing is finding wet snow and a really long hill. —Warren Buffett

Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understandin...

You only get one mind and one body. And it’s got to last a lifetime. Now, it’s very easy to let them ride for many years. But if you don’t take care of that mind and that body, they’ll be a wreck forty years later. … It’s what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.1

Compounding Positive Thoughts

Whatever the mind of man can conceive and believe, it can achieve. Thoughts are things! And powerful things at that, when mixed with definiteness of purpose, and burning desire, can be translated into riches. —Napoleon Hill

Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. —Calvin Coolidge

Munger’s excruciatingly painful experiences with multiple adversities during his lifetime: In 1953, Charlie was 29 years old when he and his wife divorced. He had been married since he was 21. Charlie lost everything in the divorce, his wife keeping the family home in South Pasadena. Munger moved into “dreadful” conditions at the University Club and drove a terrible yellow Pontiac. … Shortly after the divorce, Charlie learned that his son, Teddy, had leukemia. In those days, there was no health insurance, you just paid everything out of pocket and the death rate was near 100 percent since there was nothing doctors could do. Rick Guerin, Charlie’s friend, said Munger would go into the hospital, hold his young son, and then walk the streets of Pasadena crying. One year after the diagnosis, in 1955, Teddy Munger died. Charlie was 31 years old, divorced, broke, and burying his 9-year-old son. Later in life, he faced a horrific operation that left him blind in one eye with pain so terrible that he eventually had his eye removed. It’s a fair bet that your present troubles pale in comparison. Whatever it is, get over it. Start over. He did it. You can, too.3

God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference. —“Serenity Prayer”

Our life is what our thoughts make it. —Marcus Aurelius

These words of Charles Fillmore, from his book Prosperity, go right to the heart of what gives us our single greatest power as human beings: You can do anything with the thoughts of your mind. They are yours and under your control. You can direct them, coerce them, hush them, or crush them. You can dissolve one thought and put another in its stead. There is no other place in the universe where you are the absolute master. The dominion given you as your divine right is over your own thoughts only. When you fully apprehend this and begin to exercise your God-given dominion, you begin to find the way to God, the only door to God, the door of mind and thought.6

“The costs of your good habits are in the present. The costs of your bad habits are in the future.”

Compounding Good Habits

What you are is what you have been. What you’ll be is what you do now. —Gautama Buddha

“First we make our habits, then our habits make us.”

“The most powerful force that could be potentially harnessed is dogged incremental constant progress over a very long time frame.”10

When you improve a little each day, eventually big things occur. When you improve conditioning a little each day, eventually you have a big improvement in conditioning. Not tomorrow, not the next day, but eventually a big gain is made. Don’t look for the big, quick improvement. Seek the small improvement one day at a time. That’s the only way it happens—and when it happens, it lasts. —John Wooden

Compounding Wealth