Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade—and some relearned in 2008—any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

Life, business, and investing are games of probabilities, and almost all probabilities are less than 100 percent. So you are going to be wrong and lose sometimes, even when the odds are in your favor.

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”

A peaceful night’s sleep and assured survival is much more important than higher relative returns for one’s overall well-being.

How much you are able to retain after the recovery from a bear market is far more important than how much paper profit you make during a bull market.

People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think [emphasis added]. —Charlie Munger

Risk is what’s left over after you’ve thought of everything possible, plausible, and probable. The human mind’s tendency to completely discount six sigma and other rare events from the realm of possibility is what Taleb warns about in his book The Black Swan.

“There are decades where nothing happens; and there are weeks where decades happen.”

For example, unlike banks, which generally have a sticky deposit base, microfinance companies always depend on funds from the credit markets, which turn hostile as soon as an adverse business event could affect collections from borrowers. Add to this the ever-present political risks to which they are subject and the unsecured nature of their lending and it is understandable why microfinance businesses should be accorded a lower valuation than banks with comparable return ratios and asset quality. A similar principle applies to businesses that depend on the kindness of one or two primary clients. The pricing power goes away if customers know that they are critical to the company’s survival. Businesses with excessive customer concentration generally do not get a high valuation multiple. (Investors should study what happened to RS Software India, which used to get about 85 percent of its revenues from Visa.)

Time in the market matters, not timing the market. The ability to keep investing at regular intervals, to stay the course through thick and thin, ups and downs, and bull markets and bear markets, and to not worry where the markets are going tomorrow, or next week, or next month is what matters. Simple. It’s simple but not easy.

The stock market is the only market in which things go on a fire sale and people run out of the store. Ignore the scary predictions and constant urging from the gurus and experts for you to cash out during times of fear and panic in the market, especially when you are sitting on sizeable unrealized gains (that is when your temptation to book your profits and cash out will be at its peak).

accentuates

reverberations

Louis Pasteur rightly said, “Chance favors the prepared mind.” There is no alternative to hard work.

ensemble

serendipity

One of the most counterintuitive ideas in investing is averaging upward, or adding to a winning position (also known as pyramiding). If we are invested in a great business that will be worth several times its current market cap (over time, an investor’s mind evolves into thinking in terms of market cap rather than stock price) in the medium to long term, then we must not hesitate to add more shares at a higher (sometimes much higher) price than our original cost basis. Our focus as investors should always be on expected returns based on the current price.

Successful investing is investing that lets you sleep peacefully at night. Success is not about who makes the highest returns or who makes the most money. It is about achieving our financial goals in a timely manner with the lowest possible risk.

“The quantity of a man’s pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss.”

(For example, most people would be highly surprised to know that, in 2016, mosquitos killed more people per day, on average, than sharks killed cumulatively over the preceding one hundred years.)

I know what these emotions (figure 31.4) feel like, because I committed many atrocities in my initial investing years: 1. Trying to make some “quick money” by taking a loan from the broker to buy shares in a “hot” initial public offering (IPO), with the sole objective of “flipping” it on listing day. 2. Taking margin exposure in a stock by paying interest to the broker, with the sole objective of selling the stock at a small but “quick profit” immediately after its expected (by me) strong results, scheduled for release the next day or next week. 3. Buying a stock solely based on a multibagger recommendation from a widely followed blog, intending to sell it after a small but quick rise. 4. Buying a stock in the secondary market in the hope of making a quick profit driven solely by valuation rerating ahead of the near-term, highly anticipated IPO of a leading company from the same sector. 5. Getting lured into buying a rapidly rising small-cap stock in a hot sector out of greed and the fear of missing out, and bypassing the necessary initial research work, like studying its annual reports, past track record, financials, and management quality. 6. Buying a company’s stock based on vivid stories about a glamorous and highly publicized joint venture or partnership with a global giant in its industry, without bothering to look at the economics of the arrangement. In the hands of a good storyteller, almost every stock looks like a winner. (To safeguard yourself, always assume you...

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

ruminating

Inhale blessings. Exhale gratitude. Gratitude is the most effective path to find contentment. If you need to wake up early as a parent, you should feel grateful for having children to love. If you need to clean or repair your home, you should feel grateful for having a place to live. If you have laundry chores to take care of, you should feel grateful for having clothes to wear. If you have dishes to clean, you should feel grateful for having food to eat. If you feel tired in bed, you should feel grateful for being alive in this beautiful world.

Every success is an opportunity to demonstrate humility. Every setback is an opportunity to demonstrate resilience and build character.

Eat right and at the right time during the day. The key to good health lies in three words: moderation, consistency, and sustainability. Inculcate these as a part of your daily life and you will experience compounding good health in action.

“Our outcomes are a lagging measure of our habits. Our net worth is a lagging measure of our financial habits. Our knowledge is a lagging measure of our learning habits. Our health is a lagging measure of our eating habits. Our energy is a lagging measure of our sleep habits. Our fitness is a lagging measure of our exercise habits.” We get what we repeat, so our current trajectory matters more than our current results. Success is earned—one day at a time.

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

Here is the mathematical equation for successfully compounding wealth: + Add to your savings every month; − Eliminate biases, greed, and wasteful expenses; × Multiply your time horizon;

Divide across asset classes as appropriate for your stage in life and your personal circumstances; ^ Achieve the exponential power of compounding.

SLOW DANCE DAVID L. WEATHERFORD Have you ever watched kids on a merry-go-round, or listened to rain slapping the ground? Ever followed a butterfly’s erratic flight, or gazed at the sun fading into the night? You better slow down, don’t dance so fast, time is short, the music won’t last. Do you run through each day on the fly, when you ask “How are you?” do you hear the reply? When the day is done, do you lie in your bed, with the next hundred chores running through your head? You better slow down, don’t dance so fast, time is short, the music won’t last. Ever told your child, we’ll do it tomorrow, and in your haste, not see his sorrow? Ever lost touch, let a friendship die, ‘cause you never had time to call and say hi? You better slow down, don’t dance so fast, time is short, the music won’t last. When you run so fast to get somewhere, you miss half the fun of getting there. When you worry and hurry through your day, It’s like an unopened gift thrown away. Life isn’t a race, so take it slower, hear the music before your song is over.1

IF— RUDYARD KIPLING If you can keep your head when all about you Are losing theirs and blaming it on you, If you can trust yourself when all men doubt you, But make allowance for their doubting too; If you can wait and not be tired by waiting, Or being lied about, don’t deal in lies, Or being hated, don’t give way to hating, And yet don’t look too good, nor talk too wise: If you can dream—and not make dreams your master; If you can think—and not make thoughts your aim; If you can meet with Triumph and Disaster And treat those two impostors just the same; If you can bear to hear the truth you’ve spoken Twisted by knaves to make a trap for fools, Or watch the things you gave your life to, broken, And stoop and build ’em up with worn-out tools: If you can make one heap of all your winnings And risk it on one turn of pitch-and-toss, And lose, and start again at your beginnings And never breathe a word about your loss; If you can force your heart and nerve and sinew To serve your turn long after they are gone, And so hold on when there is nothing in you Except the Will which says to them: “Hold on!” If you can talk with crowds and keep your virtue, Or walk with Kings—nor lose the common touch, If neither foes nor loving friends can hurt you, If all men count with you, but none too much; If you can fill the unforgiving minute With sixty seconds’ worth of distance run, Yours is the Earth and everything that’s in it, And—which is more—you’ll be a Man, my son.1