Key Takeaways from "Joy of Compounding"
These are my biggest take aways from the book Joy of Compounding by Gautam Baid
Disclaimer: Many quotes are without source or out of context, this is not financial advice.
On learning
- The only person you need to be compare to is yourself. Try to be smarter everyday. Reading makes you smarter every day. You can become a learning machine by just dedicating some time in your day to reading.
- The difficult thing about learning is that not everyone wants to do it. Reading allows your to learn the lessons from others, a 300 page book accumulates thousands of hours and decades of work.
- Curiosity is antifragile like an addiction; magnified by attempts to satisfy it.
- Your mind is a library and reading improves: (a) The accuracy and relevance of information you store, (b) the ability to find information on demand, and Š Your ability to put use and to apply the knowledge.
On Reading
- Different levels of reading (a) analytical reading - conversing with the book by asking questions and marking, (b) Synoptical reading (the highest form) - synthesize knowledge from a comparative reading of several books about the same subject.
- Reading multiple books simultaneously, quitting those that are not engaging, and constantly picking up new ones is the antifragile approach to self-education.
- The âMatthew effectâ refers to a person with a larger knowledge base which allows the person to acquire greater expertise at a faster rate = as you read increasingly more your ability to absorb knowledge increases.
Learning techniques
- Subtractive epistemology = removing what we think is wrong build on the idea that what does not work (ie, negative knowledge) is more robust than positive knowledge.
- Feynman technique: (1) pick and study a topic, (2) take out a blank sheet of paper and write at the top of the subject you to learn. Write out what you know about the subject as if you were teaching it to someone who is unfamiliar. (3) Use simple language a child can understand. If you struggle you have a clear understanding where your knowledge gaps are.
- Without great solitude no serious work is possible
- The more focused you are the more energy you put toward what youâre working on
- If you are the smartest person in a room, you are in the wrong room.
- You must understand the opposite side of the argument better than the person holding that side does. Your opinion is more credible when you also can clearly articulate the contrary view.
On investing
- Upside potential is overrated. Downside protection is underrated.
- Investorâs edge is less about knowing more than others but more about mind-set, discipline, and willingness to take the long term view about the intrinsic value of a business
- Financial independence: Doesnât mean you donât work just that you donât need to. It removes the internal distraction of unpredictable employment.
- Money doesnât signify independence, control over time does.
- In the short run the market is a voting machine in the long run it is a weighing machine
- Financial metrics might be attractive but a parasitic relationship of extracting value from customer. Usually ends up destroying value in the future.
- If what you do needs a 3 year horizon, you will have a lot of competition. If what you need to do takes 7 years you will have a fraction of the competition.
- Incentive-based bias: Never ask for recommendations, forecast or opinions. Ask what they have in their portfolio
- Intrinsic value: The price that an informed buyer would pay for the business and its future stream of cash. The most important single factor determining value. Intrinsic value was never thought of as a single point estimate of value - the concept is a very hypothetical range of approximate value which would grow wider as the uncertainty of the picture increased
- Bubbles are more a social phenomenon than an economic or financial one. People crave the shared experience of being part of something exciting and new.
- Decide based on your opportunity costs
- Many investors avoid looking at the widely followed large-cap stocks because they assume everyone else does.
- Market is characterized by meta-randomness.
- Diversification is the best way to admit you have no idea what will happen in the future. Holding 8 stocks eliminates 81% of the risk in owning just one stock. Holding thirty two stocks eliminates 96% of the risk.
- Always be aware of the potential downside. If the consequence of an action is not acceptable to then no matter how low the porbability it needs to be avoided.
- We live in extremistan a world full of feedback loops, interdependence and black-swan ridden. There are decades where nothing happens, and there are weeks where decades happen
- Never bet your entire capital on a single stock or sector
- If you are smart you don't need leverage, and if you are dumb you have no business using it
- Time is the best test of fragility
- Severe change and exceptional returns usually donât mix
- The best time to invest money is when you have money. This is because history suggests its not timing which matters, but time.
- Successful investment is investing that les you sleep peacefully at night
On values
- Pride in being trustworthy is perhaps the most desireable: Build trust by honest communication, being authentic and sincere in words and actions, being transparent and admitting mistakes, being reliable and fair in our dealings with others.
- Millions ways to get rich, only one way to stay rich: Humility
- Best thing another human can do is to help another human to know more. The Help others win so you can never lose
- Acting in an ethical manner with everyone is the most honorable way to lead oneâs life
- Delayed gratification: Doing what is hard no rather than doing what is easy. This leads to greater success and satisfaction than taking the easier path
- Self-sufficiency is the greatest wealth. Wealth consists not in having great possessions but in having few wants.
- A man who will steal for you will steal from you
- Beginnerâs Mind: New evidence should modify your prior beliefs and convert them into our posterior beliefs.
- When information is cheap, attention becomes expensive
- Itâs okay to be wrong but its not okay to remain wrong
On decision making:
- More important than the will to win is the will to prepare.
- Limited exposure to media as a guiding principle for decision making under uncertainty. In line with the âLindy effectâ: always respect the old - the life expectancy of non-perishable technologies/ ideas is proportional to their current age.
- Inverting: turn a situation or problem upside down. What happens if everything goes wrong?
- Fatigue: decisions draw on willpower - focus on making fewer and better decisions. The goal of investment is to find situations where it is safe not to diversify
- Hyperbolic discounting: short term demanding and long-term inattentive
- Self serving bias: encourages to have an overly positive view of our abilities or being overly optimistic.
- Availability bias: When we have info about one case, we rarely want to know the statistics.
- Best way to overcome incentive-caused bias is to become financially independent
- Physics-envy: A scientific theory, should be as simple as possible, but no simpler.
- More fiction has been created using Excel than Word. The combination of precise formulae with highly imprecise assumptions can be used to establish or rather to justify practically any value on wishes.
- Mentally liquidate your portfolio before the start of every day and ask yourself: Based on the current and updated information, would I buy it at the current price? Sell clinging to stocks with unsatisfactory expected future returns from their current price is a costly mistake.
- B2b businesses change much slower than B2c
- Many investors confuse uncertainty for risk. Uncertainty is an opportunity.
- Invest in companies with tailwinds (ie, subsidies from the state) not headwinds (oil industry, tabaco)
- Banks typically are exposed to more leverage
Book recommendations
- Richest Man in Babylon - George Clason
- The Way to Wealth - Benjamin Franklin
- The millionaire next door - Thomas Stanley
- Superforecasting - Philip Tetlock