never interrupt compounding growth

2020-12-22

 | 

~3 min read

 | 

408 words

A market comprised of individuals all bringing their own preferences, temperaments, risk appetites, and time horizons means that for most trades, there’s someone willing to take the other side. That’s a truly marvelous thing that is nearly beyond comprehension and certainly beyond any individual’s ability to coordinate / plan it.

Preference, temperament, and risk appetite get more of the headlines. They’re the levers that investors can pull on a daily basis. While less sexy, time horizons can play an outsized role in the final calculus, a fact I was reminded of recently when I read two articles:

  1. Ben Carlson’s update on post of his 2014, What If You Only Invested at Market Peaks, with new numbers and an accompanying video.
  2. Rohan Rajiv’s review of The Psychology of Money by Morgan Housel, a book I’ve been looking forward to reading since I read Morgan’s blog post by the same title

In “What If You Only Invested at Market Peaks”, Ben tells the story of Bob, the “World’s Worst Market Timer”, and his abysmal investing record.

Despite buying into four market peaks, Bob retired a millionaire thanks to his saving grace: once money’s in the market, he didn’t touch it. The story illustrates, among other things, the remarkable resilience of the market over an extended period of time to produce positive results if allowed.

This gets to the second point:

The key with compounding is to not interrupt it.

— Rohan Rajiv

The math behind this simple concept is compelling, however psychologically it can be challenging to accept. Actively deciding to not do something is difficult. In learning how to accept the fluctuations of the day, I have taken much from Benjamin Graham’s The Intelligent Investor. After reading it, I came away with a few conclusions:

  1. I do not have the temperament or desire to be an investor.
  2. All of the “investments” I’d made was actually just speculating.

As a result, I sold individual equities and invested in low fee mutual and index funds, adopting Graham’s Investment Owner’s Contract.1

I like this approach for its simplicity. I do not need to be smarter than anyone, I just need to be patient and never interrupt compounding growth. That seems like a much more achievable proposition.

Footnotes

  • 1 This includes Amazon, up 7.5x from where I purchased it, and Facebook up 9x.
  • 2 This statistic comes courtesy of Rohan Rajiv.

Hi there and thanks for reading! My name's Stephen. I live in Chicago with my wife, Kate, and dog, Finn. Want more? See about and get in touch!