The Joys of Compounding

But the most important reason for saving is personal freedom and control over time. This allows us to devote more attention to the meaningful aspects of our lives, such as relationships, creative pursuits, health, and philanthropy.

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts…. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

Don’t live a life based on approval from others. Be authentic—act in accordance with who you are and what you believe in, or one day your mask will fall off.

Let your life be guided by internal principles, not external validation. Self-respect beats social approval. Every

Long-term investors look for management teams that are willing to defer gratification.

These teams are focused on building a durable economic franchise.

They are focused on the longevity of the business. They are willing to forgo near-term earnings to increase long-term value.

Noted value investor Thomas Russo has often talked about companies that have “the capacity to suffer,” or the capacity to reinvest to build long-term competitive advantage at the cost of depressed short-term reported earnings. Usually, these companies have an ownership structure that keeps activist investors at bay. Usually, some individual or entity has enough control to adhere to a strategic path and build a long-term economic franchise without bothering too much about short-term profitability.

Growing a business in a new market requires high upfront costs. These higher costs depress current earnings, which negatively affect the stock price in a shortsighted market. Most early upfront costs beyond production and distribution are put toward converting people into lifetime consumers as their income grows. Significant advertising and promotion is needed initially to maintain early market presence before a company sees growth in market share or profits. That process takes time and requires a lot of patience, which most management teams do not have. That nagging itch from shareholders, employees with stock options, and the management’s net worth measurements cause companies to make a little compromise here, hold back on some needed investment there, to feed the earnings machine, pacify Wall Street, and prop up the stock price. Just scratch that itch a little bit. It will feel so much better.

Management teams that are influenced easily by short-term-oriented shareholders, like an activist, tend to focus on activities that drive short-term results at the expense of long-term success.

Valuation: Measuring and Managing the Value of Companies,

Investors should exercise active patience, that is, diligently verifying their original investment thesis and doing nothing until something materially adverse or negative emerges.

Investors tend to become complacent and stop questioning their existing holdings when their stock prices are going up.

They resume analyzing in detail only when the prices start falling. Don’t analyze your holdings only when they fall. Just because the stock price of an existing holding is going up doesn’t necessarily mean that nothing negative is happening in its business.

To make money in stocks, you need to have vision to see them, courage to buy them and patience to hold them. Patience is the rarest of the three.

“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.

focusing on long-term compound annual growth rate (CAGR) instead of yearly returns, and embracing volatility leads to significant financial rewards. This is time arbitrage in action.

The longer you can extend your time horizon, the less competitive the game becomes, because most of the world is engaged over a very short time frame. —William Browne

As a result, many investors end up engaging in “hyperbolic discounting,” heavily discounting the distant but large cash flows of high-quality businesses by applying high equity risk premiums, and they end up with much lower estimates of intrinsic business value than otherwise would have been the case.

The path to lasting wealth is deferred gratification, savings, and compound interest. Develop

The idea of kaizen is to make such small changes in your life that your brain doesn’t even realize that you are trying to change and therefore doesn’t get in the way. Kaizen is a neat mental hack that helps us bypass our brain’s fear response.

The smaller steps, however, get us to the desired goal because they can be incorporated more easily into our daily life. Small steps make delaying gratification easier and sustainable.

Be passionate about the business but dispassionate about the stock. Celebrate the big successes of your businesses and reflect on failures. A true feeling of ownership gives an investor the conviction to hold. When you think like a business owner, you no longer view stocks as pieces of paper or buy them with “target prices” in mind. Instead, you view stocks as part ownership in a business and you want to savor the journey alongside the promoters. As companies grow larger and more profitable, their stockholders share in the increased profits and dividends. Invest for the long term. Live fully today.

If people don’t have to pay for a benefit, they tend to overuse it. After a success, we become overly optimistic risk takers. After a failure, we become overly pessimistic and risk averse. This happens even in cases in which success or failure was merely a result of chance. We do not improve the man we hang; we improve others by him.

Tie incentives to performance. Ensure that people share both the upsides and downsides. Make them understand the link between their performance, their reward, and what you want to accomplish. Reward individual performance, not effort or length of time in the organization.

You are more likely to be right if you try to prove yourself wrong. You should hold and explore conflicting possibilities in your mind while steadily advancing toward what is likely to be the truth, based on what you learn along the way. If you find yourself in a hole, stop digging.

To admit you are wrong means you are wiser today than yesterday.

The greatest enemy of truth is the innate desire to win every argument.

Learning is what happens when you end up justifiably agreeing with people who disagree with you.

Be open-minded and always triangulate your thesis with people who see things differently from you.

By engaging them in thoughtful disagreement, you will gain a better understanding of their reasoning and allow them to stress test your thoughts.

“The aim of an argument, or of a discussion, should not be victory, but progress.” Focus on understanding, not on agreement or disagreement. Judgment follows understanding, not vice versa.

People respond to immediate threats. Anything that happens gradually tends to get ignored.

Impatience. When we are impatient, we value the present more highly than the future.

A bad person can make a good argument. Judge the argument, not the person. Practice intellectual integrity.

“Better to remain silent and be thought a fool than to speak and remove all doubt.”

The key to understanding the limits to our knowledge is to check the results of our decisions against what we thought was going to happen and why we thought it was going to happen. This feedback loop is incredibly important, because the mind won’t provide it on its own.

“man is not a rational animal; he is a rationalizing animal.”

You probably would not choose to dine at a restaurant whose chef always ate elsewhere. You should be no more satisfied with a money manager who does not eat his or her own cooking. It is worth noting that few institutional money managers invest their own money along with their clients’ funds. The failure to do so frees these managers to single-mindedly pursue their firms’, rather than their clients’, best interests.10

Outsider CEOs (as opposed to founders) in public companies avoid long-term value-creating investments and research and development, because their compensation is based on their meeting or beating quarterly street expectations.

It is difficult to get rich on a salary because you get paid linearly for analyzing and solving a given problem in a job. But you get paid in an exponential manner for spotting and seizing opportunities as an investor, venture capitalist, or entrepreneur.

Ultimately, the best way to overcome incentive-caused bias is to achieve financial independence, because this independence empowers you to see things as they really are. Only free people can be honest. Only honest people can be free.

“It is better to be roughly right than precisely wrong.”

Not everything that counts can be counted, and not everything that can be counted counts. —Albert Einstein

Well, practically everybody (1) overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure stuff that may be more important [emphasis added].

“physics envy,” the common human craving to reduce enormously complex systems (such as those in economics) to one-size-fits-all Newtonian formulas.

For example, spreadsheets cannot model trust, integrity, goodwill, reputation, or the execution capabilities of the management. Thus, due diligence always needs to have a softer, subjective side to it. Investing is part art and part science. Nuanced judgment is required.

Over the years, I have come to appreciate the fact that investing is a field of simplifications and approximations rather than of extreme precision and quantitative wizardry.

The smarter you are, the better you are at constructing a narrative that supports your personal beliefs, rationalizing and framing the data to fit your argument or point of view. You may be smart, but not necessarily intelligent, because intelligence is the ability to arrive at accurate cause-and-effect descriptions of reality.

In the past, Warren Buffett has described intrinsic value as private owner value, the price that an informed buyer would pay for the entire business and its future stream of cash.

What is the normalized earning power of the business? In other words, if I am a private buyer, how much cash will this business put in my pocket each year, after paying for the expenditures required to maintain my competitive position? What normalized owner earnings can I expect from this business?

If investors focused on reducing unforced errors instead of trying to hit the next home run, then their returns would improve dramatically.

wins. In the view of Ellis, investing, like tennis, is a loser’s game. The winners in the game come out with superior long-term results simply by making fewer mistakes. The losers end up with losses because they make the same mistakes repeatedly. No one can avoid making new mistakes, but the great investors repeat old mistakes less often.

On balance, paying a high price for even a great business may not always work out well if you have to sell that business in one or two years. But if you plan to hold your stocks for longer periods of time—say, five years, ten years, or longer—then quality becomes “much more important” than cheap initial valuations when assessing margin of safety.

when investing in long-term compounders, pay maximum attention to the quality of business and management above all else.

For a Warren Buffett–Charlie Munger–Phil Fisher investor, the margin of safety comes from the ability of a business to deliver high returns on invested capital on a sustained basis over long periods of time, which in turn comes from a durable competitive advantage created by exceptional managers at the helm. These franchise-focused investors do not hesitate to pay up for quality in

the form of an expensive multiple for current year earnings if they believe that the future earnings will be significantly higher.

High quality always beats a bargain over time. Although there are certainly exceptions, in the long run, bargains never outperform solid investments. This simple yet profound principle can be applied to virtually every area of life. Crash diets, predatory pricing, dishonesty, and shortcuts can work well for a while, but they are never sustainable.

The risk of paying too high a price for good-quality stocks—while a real one—is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to “earning power” and assume that prosperity is synonymous with safety [emphasis added].

You just need to keep playing your own game, regardless of the game others are playing. Never confuse your time frame with someone else’s. A meaningful price level for a shorter-time-frame participant is often an irrelevant figure to someone planning to hold longer term.

If you spend many weeks and months evaluating a business and end up discarding the name after doing all the work, it is not a waste of time. This time is very well spent.

“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

The longevity of growth is always given a greater weight by the market than the absolute rate of growth, so you often will notice stocks with 12 percent to 15 percent predictable earnings growth for the next ten to fifteen years getting current year price-to-earnings (P/E) multiples of 40× to 50×.

“The worst business of all is the one that grows a lot, where you’re forced to grow just to stay in the game at all and where you’re reinvesting the capital at a very low rate of return. And sometimes people are in those businesses without knowing it.”8

I love the business Munger talks about, which cuts me a check every year from its owner earnings. Ideally, however, I am looking for a business that will forgo sending me a check because it has attractive internal reinvestment opportunities. In other words, I prefer a business that not only produces high returns on invested capital but also consistently reinvests a large portion of its earnings at similarly high returns.

This is] perhaps Mr. Smith’s most important point…and certainly his most novel point. Well-managed industrial companies do not, as a rule, distribute to their shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus, there is an element of compound interest [emphasis added] operating in favor of a sound industrial investment.”12

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

“I will tell you how to become rich. Close the

doors. Be fearful when others are greedy. Be greedy when others are fearful

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”8

“Fortunately, one of the most valuable lessons of my career came in the early 1970s, when I learned about the three stages of a bull market: the first, when a few forward-looking people begin to believe things will get better, the second when most investors realize improvement is actually underway, and the third, when everyone’s sure things will get better forever.”9

“Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.”

It is impossible to know exactly when a market cycle will end, because the pendulum can swing too far in either direction.

Patience is a great equalizer of cycles in the financial markets.

“The real key to making money in stocks is not to get scared out of them.”14 Low- and negative-return years are a routine part of the investing game.

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” He continues, “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy [emphasis added].”17

Thinking in terms of a reverse discounted cash flow analysis to evaluate stocks during such periods helps investors make better decisions.

Knowing when the market is being brilliantly rational and when it is being ludicrously irrational is learned from experience and an extensive study of financial history.

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. This insight struck me as incredibly important.

“Efficiency is doing things right; effectiveness is doing the right things.”

The best long-term performers in any probabilistic field, including investing, always emphasize process over outcome.

investment process is a set of guidelines that governs the behavior of investors in a way that allows them to remain faithful to the tenets of their personal philosophy.

The investment industry is obsessed with outcomes in the short term over which one has no direct control. A sound process can occasionally generate poor results (bad luck), just as a bad process can occasionally generate superior results (dumb luck).

An investment philosophy, however, is something that is gradually built over time.

We cannot control the movement of the markets any more than we can control the returns. We can, however, always derive a great deal of intellectual satisfaction from following a sound process and staying true to our personal investment philosophy.

To make money, we need luck. To create wealth, we need consistency. Any

The solution is not to keep changing the strategy but rather to stick to it, with the understanding that discipline is the price to be paid for long-term outperformance.

Compounding is a lifelong journey, and an individual’s impatience with his or her investment process could lead to a fatal decision and bring the journey to an abrupt end.

Stay the course and remain faithful to your personal investment philosophy and your individual process. Focus is the key to success. Successful investors identify their niches and stick to them, gradually evolving over time as they learn and adapt.

It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds.

The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task [emphasis added].

to finish first, you must first finish.

Always be aware of the potential downside. If the consequence of an action is not acceptable to us, then, no matter how low the probability, we must avoid that action.

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”6

In a market crash, both quality and junk fall. Quality eventually rises again and junk never recovers.

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.

Quality of the business and integrity of the management matter the most in creating and, much more important, in retaining the hard-earned long-term wealth.

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

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.

let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak [emphasis added].

The even bigger picture tells us that, for more than two centuries, in spite of all of the major and minor calamities and all of the hundreds and thousands of reasons continuously given for why the world might be coming to an end, equities have rewarded their owners with real gains of more than 6.5 percent a year, on average

This tells me that attempts at market timing are a source of risk, not protection [emphasis added].”

Time in the market matters, not timing the market.

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.

The stock market is the only market in which things go on a fire sale and people run out of the store.

If anyone can refute me—show me I’m making a mistake or looking at things from the wrong perspective—I’ll gladly change. It’s the truth I’m after and the truth never harmed anyone. What harms us is to persist in self-deceit and ignorance.

Flexible thinking is the ability to keep an open mind upon encountering new facts or situations and to be adaptive to changing a viewpoint from previously held thoughts or beliefs, however strongly held.

When I work I have no sunk costs. I like changing my mind. Some people really don’t like it but for me changing my mind is a thrill. It’s an indication that I’m learning something. So I have no sunk costs in the sense that I can walk away from an idea that I’ve worked on for a year if I can see a better idea. It’s a good attitude for a researcher. The main track that young researchers fall into is sunk costs. They get to work on a project that doesn’t work and that is not promising but they keep at it. I think too much persistence can be bad for you in the intellectual world.

had, also, during many years followed a golden rule, namely, that whenever a published fact, a new observation or thought came across me, which was opposed to my general results, to make a memorandum of it without fail and at once; for I had found by experience that such facts and thoughts were far more apt to escape from memory than favorable ones. Owing to this habit, very few objections were raised against my views which I had not at least noticed and attempted to answer.26

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. This way of thinking is quite unnatural in the face of our genetic makeup, wherein the more typical response is to look for as much confirming evidence as possible. When practiced in the right spirit, however, it is a powerful way to beat our shortcomings in becoming objective and unbiased.

When you find the goose that lays golden eggs, don’t sell the goose. One big lesson I have learned over the years is to be reluctant to sell a great business

that is trading at expensive valuations, especially when cash is the alternative.

…If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never [emphasis added].

Cash will always prove to be valuable on occasion, but over a period of twenty to thirty years, the drag on portfolio performance from holding cash will be much more significant than the few occasional benefits one would get from taking advantage of any periodic downturn with “dry powder.” John Templeton’s quote on the subject of “when to invest” is one of my favorites: “The best time to invest is when you have money. This is because history suggests it is not timing which matters, but time.”30

Always acknowledge and embrace reality for what it is and don’t engage in what Munger calls “thumb-sucking.” If you are unsure about a stock even after your best efforts to resolve your doubts, just exit and get out. Otherwise, you will end up selling in panic, at a much lower price, during the next sharp market correction.

“A man who has committed a mistake and doesn’t correct it is committing another mistake.”

If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs—in other words, it’s your alternatives that matter. That’s how we make all of our decisions.

In the long run, opportunity costs can really matter a lot and sometimes are far more significant than errors

of commission. Mistakes of commission are capped at 100 percent, but mistakes of omission have no such ceiling.

Yet all these intangible assets are absent from the balance sheet, and thus analysts cannot form accurate opinions about firms’ earning potential. Lev identified this lack of information many years ago as the source of a market anomaly

risk (permanent loss of capital)

They tend to choose a known probability of winning over an unknown probability of winning, even if the known probability is low and the unknown probability could be a guarantee of winning. (This paradox in decision theory in which people’s choices violate the postulates of subjective expected utility is known as the Ellsberg paradox.)

Fear of the unknown is one of the most potent kinds of fear, and the natural reaction is to get as far away as possible from what is feared.

According to Adam Parker, former U.S. equity strategist at Morgan Stanley, the impact of sector-specific factors on a typical stock’s annual return accounts for more than half of a stock’s performance.

You can be an average passenger but if you get on the right train it will carry you a long way.”

Don’t think about why you question, simply don’t stop questioning. Don’t worry about what you can’t answer, and don’t try to explain what you can’t know. Curiosity is its own reason. Aren’t you in awe when you contemplate the mysteries of eternity, of life, of the marvelous structure behind reality? And this is the miracle of the human mind—to use its constructions, concepts, and formulas as tools to explain what man sees, feels and touches. Try to comprehend a little more each day. Have holy curiosity. —Albert Einstein

They surround themselves with smarter and wiser people. When pursuing their goals, they always leave some room for serendipity. They do not ignore the importance of accidental discoveries (e.g., events, parties, meetings, conferences, and chance happenings), and they keep an open mind to all possibilities. They take calculated risks.

They believe in the dictum “Strong beliefs, loosely held.” In short, they move with life, not against it.

accepting luck as a primary determinant in your life is one of the most freeing ways to view the world. Why? Because when you realize the magnitude of happenstance and serendipity in your life, you can stop judging yourself on your outcomes and start focusing on your efforts. It’s the only thing you can control [emphasis added].4

What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises—that the world is surprising.

Everybody is looking for this Formula. Unfortunately, there isn’t one. The truth is that the world of money is a world of patternless disorder, utter chaos. Patterns seem to appear in it from time to time, as do patterns in a cloudy sky or in the froth at the edge of the ocean. But they are ephemeral. They are not a sound basis on which to base one’s plans….

…Countless speculators and gamblers have been bankrupted by failing to quit while they were ahead. The Gambler’s Fallacy tends to encourage that failure, for it engenders the feeling that one is temporarily invincible. That is a dangerous feeling to have. Nobody is invincible, not even for half a second…. It might be hard, indeed, to remain perfectly rational after an experience like that [emphasis added].5

“Be fearful when others are greedy and greedy when others are fearful.”8 This is exactly why one should not be swayed by outcomes, that is, by a few recent years of high return performance by any money manager or investment advisor.

Numerous research studies have identified a common trait among successful professionals in fields of probabilistic activity: they all emphasize process over outcome.

But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome.”

I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn. —Charlie Munger

You can borrow someone’s idea, but you will never be able to borrow their conviction.

“The day you graduate from childhood to adulthood is the day you take full responsibility for your life.”

is also true in investing. Choose the right people, then clone their behavior, thinking, process, and orientation—and never blindly their ideas—and you will become like them over time [emphasis added].1

“It is the first duty of every citizen to question authority.”

Investors often anchor themselves not only to the stock price but also to the past actions of the promoter, even if the promoter has since been reformed and has taken corrective steps like closing down a bad division, improving investor communications, or professionalizing the board.

More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.3

If the story has gone wrong, simply book your losses and move on to a better opportunity.

Missing out on an early opportunity creates regret. That regret often is unwarranted because, for a truly outstanding business, multiple opportunities to buy the stock exist. By definition, a hundred-bagger is a ten-bagger twice over.

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.

“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.”

Do not compare yourself with others. The only

you need to be better than today is the person you were yesterday. Competing with others makes you bitter. Competing with yourself makes you better. Great wisdom can be found in Ernest Hemingway’s words: “There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self.”

Successful investing is investing that lets you sleep peacefully at night.

It is about achieving our financial goals in a timely manner with the lowest possible risk.

When we have a negative opinion about the person delivering the message, we close our minds to what they are saying and miss a lot of learning opportunities because of it. Likewise, when we have a positive opinion of the messenger, we tend to accept the message without much vetting. Both are bad.

One form of stress is cognitive dissonance. We experience this type of stress when we simultaneously hold onto two contradictory thoughts, beliefs, opinions, or attitudes. This dissonance often leads to illogical and irrational actions. A personal example from my investing journey illustrates this experience.

A remedy to stress-influence tendency is to delay making decisions until the time at which you feel less stressed. Give yourself a cooling-off period and take stock of the situation when you are feeling calm and relaxed. And then, peacefully think over your decision.

Framing is an outcome of our aversion to losses. Evolution has programmed our brain to seek loss minimization instead of gain maximization.

We like winning more than losing, and we keep an internal score for each stock in our portfolio. We maintain a separate mental account for each of our stocks, and we want to close every future sale transaction only with a gain. Instead of looking at overall portfolio performance, we try to gain from every single stock. This narrow framing is known as the disposition effect, and it results in selling winners and holding on to losers. As Peter Lynch puts it, this is the equivalent of “cutting the flowers and watering the weeds.”

Richard Thaler and Cass Sunstein take the idea of aversion to loss one step further.8 They explain that investors also suffer from myopic loss aversion; the more often we evaluate our portfolios, the more likely we are to see losses. And the more often we see losses, the more often we experience loss aversion, which then becomes a vicious cycle. (Financial losses are processed in the same area of the brain that responds to mortal danger.)

Be risk averse but do not be loss averse, that is, do not be afraid to take calculated risks.

Investing is not a business in which every investment is profitable. Most investors find this to be decisively true but difficult to accept. If you are obsessed with individual wins and losses, then you will end up being miserable even if your overall portfolio performs

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

According to Otto Von Bismarck, “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” Munger agrees: “The more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be.”14

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.

Money without health is pointless. Money with no good relationships will leave you lonely. We spend a lot of time focusing on compounding our financial capital, but we overlook the fact that social and intellectual capital also compound. Investing in yourself, in your relationships, and in your understanding of the world pays massive dividends over time.

Understand what is truly important to you and pursue your dreams with full dedication in a principled manner. Everything you are looking for is closer than you think, but sometimes you have to go on a journey to find it. And in your journey, the power of compounding will help you achieve what you are striving for: becoming happier, healthier, better, wealthier, smarter, and more honorable.

When you appreciate, optimize, and leverage what you do have instead of ruminating over what you don’t have, you have the power to change your circumstances.

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.

As Charlie Munger would put it, “It seemed like a good idea at the time.” But failing to learn from our mistakes is not acceptable. The difference between winners and losers is that winners take ownership of their mistakes and, as a result, they learn from them and progress in life.

The key to learning from mistakes is to acknowledge them without excuses and to make the necessary changes to improve going forward. If you can’t admit your mistakes, you won’t grow.

When you begin to change yourself internally, the world around you responds. When your consciousness or mental attitude shifts in the right direction, remarkable things begin to happen.

Try to read or watch something productive or inspirational before going to sleep. The mind continues to process the last information consumed before

bedtime, so you want to focus your attention on something constructive and helpful in making progress with your goals and ambitions. This ensures that you finish strong every day.

The first thing you have to know is yourself. People who are self-aware can step outside and observe their reactions. Self-awareness allows you to experience life twice—first with a detached point of view and second with the usual set of sensorial reactions embedded in thoughts and emotions. Two versions of your experiences are living together in the shadows of your consciousness.

The underlying nature of the universe is insecure, impermanent, and ultimately fleeting. Therefore, don’t seek security, permanence, or prolongation. Instead, make peace with your place in the greater process. The universe is in a constant state of regeneration. To evolve, the new replaces the old. The same applies at the cellular level in the human body. This is a lesson in letting go and detachment. Our body is made up of approximately 37 trillion cells, and each day our body and mind go through countless permutations and transformations.

Many of life’s failures are people who did not realize how close they were to success when they gave up. —Thomas Edison

Never give up after putting in hard work and effort, because compounding bestows its benefits on you only after a long time, after testing your patience and conviction to the fullest. This is true not only in business and investing but also in life and relationships.

The difference between interest and commitment is the will to not give up.

Growth and improvement live in those very moments—when we either step forward or shrink back. Instead of quitting every time you hit a mental or physical wall, recognize that your competitors are facing the same challenges. At this moment, if you persist and keep going, you will end up miles ahead. This “little longer” results in a massive expansion of your limits. This is compounding in action, and because its power is back-loaded, you end up exponentially multiplying the results of that little extra in your efforts.

In the end, we are defined by how we respond to failures and setbacks in our lives. Indifference toward the things outside our control is the essence of the stoic discipline—and it is one of the most liberating realizations in life.

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.

When we see the good in everyone, we start to develop compassion and understanding and, in so doing, we begin treating others the way we would want to be treated: with honor, dignity, respect, empathy, and humanity.

When we learn to see the smallest of positive attributes in everyone, we begin to respect and care for each person we encounter.

Once you’ve successfully achieved some goals, you start believing you can achieve any other goal, that is, positive thoughts start compounding in your mind. That’s why every success drives more successes.

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

One of the best health habits is to exercise for one hour three to four times every week and to avoid prolonged sedentary periods. The second habit is to get eight hours of sleep every night. The third is to drink more water and consume less sugar and junk food. All three are obvious, but they are often overlooked.

The Power of Habit, Charles Duhigg writes, “Willpower isn’t just a skill. It’s a muscle, like the muscles in your arms or legs, and it gets tired as it works harder, so there’s less power left over for other things.”7 During times when other parts of our lives deplete our supply of willpower, we may end up neglecting our goals.

Whenever you’re having trouble sticking to a new habit, try a smaller version until it becomes automatic. Do less than you’re capable of, but do it consistently. That is the key to compounding.

You have to build a program that you can do for decades, not weeks or months.

Habits form the foundation of productivity. The more you do automatically, the more you are subsequently freed to do. This effect compounds. Focus on your environment (virtual and physical), because it nudges your subconscious and affects your habits. It is more effective to design an environment in which you don’t need willpower than to rely on willpower to conquer your surroundings. Set up an environment that plays to your strengths and minimizes your weaknesses. Remember, acknowledging your weaknesses is not the same as surrendering to them. Acknowledgement is the first positive step toward overcoming weaknesses.

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.

Most people end up in this cycle: hard, hard, hard, hurt. I’d rather go: slow, slow, slow, never stop. Slow but consistent gains add up much faster than you can imagine. Small, positive changes add up to massive improvements over time (figure 32.1

we can get 5 percent better every year, then we will be about twice as good in less than fifteen years. In less than thirty years, our growth will be 4×. This is how people with average intellect surpass far more intelligent people. It is also why Peter Kaufman says, “The most powerful force that could be potentially harnessed is dogged incremental constant progress over a very long time frame.”10

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 if you’re not in too much of a hurry and keep doing sound things [emphasis added].

According to the rule of seventy-two, we double our capital every three years by compounding at 26 percent, ten times in ten years, and one hundred times in twenty years. The day I understood the dynamics of reinvested profit and compound interest, I immediately knew that I was going to become wealthy in my lifetime. I just needed to get started. I began looking forward to every day as a new opportunity to learn and improve. The goals of investment should be happiness, joy, growth, intellectual satisfaction, and eventually, peace, and serenity. Wealth and financial prosperity are natural by-products of lifelong learning.

“Money makes money. And the money that money makes, makes money [emphasis added].”

Spend time building new relationships. Too many stop building relationships after school, or after marriage, and then you find yourself in a rut and your only relationships represent who you used to be & not where you want to go. —Ian Cassel

“Your beliefs become your thoughts. Your thoughts become your words. Your words become your actions. Your actions become your habits. Your habits become your values. Your values become your destiny.”