Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that kill your confidence when they end. It’s about earning pretty good returns that you can stick with for a long period of time [emphasis added]. That’s when compounding runs wild. —Morgan Housel

The first thing to realize is that it takes a long time. I started when I was eleven. Accumulating money is a little like having a snowball going downhill; it’s important to have a very long hill. I’ve had a fifty-six-year hill. It’s important to work in sticky snow and you need a little snowball to start with, which I got from delivering the Post actually. It’s better i...

The greatest shortcoming of the human race is our inability to understand the exponential function. —Al Bartlett

importance of not churning one’s portfolio too frequently: Imagine that Berkshire had only $1, which we put in a security that doubled by yearend and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34 percent capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34 percent tax of roughly $356,500 and be left with about $692,000. The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we—taking in taxes of $356,500 vs. $13,000—though, admittedly, it would have to wait for its money.13

Compounding Knowledge

Munger sees his knowledge accumulation as an acquired, rather than natural, genius. And he gives all the credit to studying: “Neither Warren nor I is smart enough to make the decisions with no time to think. We make actual decisions very rapidly, but that’s because we’ve spent so much time preparing ourselves by quietly sitting and reading and thinking.”17

scintillating

The other key insights are as follows: • It takes a long time to create anything that is valuable. • Work hard every day, even without seeing any results in the short term. • Keep doing it consistently for a long time without giving up. • Enjoy the process and live life according to the inner scorecard. • Do not compare yourself to others. Instead, always endeavor to become a better version of yourself compared to what you were the previous day.