Investing Principles
While I was reading the Joys of Compounding, I stumbled upon a few very interesting ideas that I couldn’t get out of my head. Therefore, I thought that these ideas would also be of value to you. In this post, we will be taking a deeper look at the ideas from this book that impacted me the most.
Compounding Knowledge
I have heard it many times before but couldn’t really understand how it happens, how knowledge compounds.
The book gave an easy but great example. Let’s say that both you and Warren Buffett would read the Economist. Who do you think will get more insight out of it? You or Warren? Of course, it would be Mr. Buffett. But why?
The CEO of Berkshire Hathaway is now in his nineties and has spend the majority of his life investing and reading. As a result of this, he has gathered much more knowledge about how economies, industries, businesses and business leaders work. Therefore, he will have a better idea where to look for in such a magazine and will have a better filter for what is noise and what is insight or valuable information.
As Warren is faster and better at separating the noise from the valuable information, he will add more valuable knowledge to his knowledge base faster. This is why his knowledge will compound faster than yours.
This finally made me realize the value of continuously reading and learning. I started to try and relate this to my own and saw that this was also the case with my knowledge concerned about investing.
I remember reading the first books about investing and it was all very messy and difficult for me. I couldn’t understand a thing. Fast forward to today, I have read many dozens of investing books, blogs and articles. When I read a book right now, I finally have some context/a framework to which I could compare the things that I am reading. I could swap things in my framework and could add something to it, but most importantly, I am now finally able to recognize the things that are important and which are not. I am able to recognize when some things I read are BS or not.
Additionally, I also remember some books that I reread. While I am reading it for the second time, I notice things that I didn’t read before. Probably because in the meantime, I have learned new things which enabled me to look with fresh eyes to the piece of writing. That’s why great books should be reread once in a while. Your life has progressed, you are wiser now than you were one year ago (hopefully), and therefore read things that make an impact on you now while it didn’t at first.
Additionally, you are probably now in another state in your life then when you first read the book. The first time you read it, you were maybe still in college and may believed that career planning and making money was really important. But now, years later, you may have come to see that there’s more than getting rich quick. You now may prefer to build wealth in all aspects of life more slowly and consistently.
This realization motivates me to read even more books and try to be an even better learning-machine.
A Simple Idea
The Joys of Compounding is a great investing book, packed with a lot of very valuable ideas. Some simple, some more complicated. But the thing is that some very important but extremely powerful ideas are not completely embraced by most people. Some ideas are so simple that it’s hard for us to see their importance.
For example, everybody knows that it pays to be trustworthy and kind. But how many people make these ideas their own and aligns themselves completely with them? I would say very few.
Also, everybody knows that it pays to think long term. But how many eat unhealthy food regularly or invest in a stock to make a quick buck? I believe many – me included.
Everybody knows that it pays to seek out contradicting evidence to improve our worldview. But how many outright reject or avoid the tiniest sign of something that doesn’t align with our beliefs?
That’s why I believe that the following quote may be the most important quote you’ll ever read.
“Take a simple idea and take it seriously.”
– Charlie Munger
The first time I read this quote I didn’t really understand it. Why should one take a simple idea so seriously? But now it is obvious.
Another reason why the idea of this quote is so important is because there’s a lot of great advise out there. The problem is that we are not so good at diverging our focus and try to accomplish many things at the same time. If we divide our attention to 15 different things, it becomes very difficult to excel even at one of these. Throw in the daily hassles from life and not one of those 15 will ever become part of you.
Therefore…
“Take up one idea. Make that one idea your life – think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea, and just leave every other idea alone. This is the way to succeed.”
– Swami Vivekananda
Let’s try to make it more practical. Let’s say that we want to actively seek out views or evidence that opposes our current beliefs. I believe the first step is to start and think deeply about how you could apply it to your life. At which moments would it be useful to be aware of this idea in particular? For investors, this is probably something that we should be conscious of daily. We spend most of our time reading things and doing research into some kind of company. If we repeat this particular idea often to ourselves and keep it in the back of our minds, we will be much more likely to recognize when we find articles that oppose our beliefs. And now, we know what to do. Commit to it and read it. Maybe search for even more related articles or data that oppose our beliefs and then weigh the facts.
Humility
I have heard this idea also many times before: “Only invest in businesses that you can understand” and “stay within your circle of competence”. I understand this idea but took it too lightly. It was only because of the following sentence that I realized that I was taking it too lightly. “Warren Buffett throws 99% of the stock ideas he gets into the too-hard pile”.
Wait, what? 99%? Even for the best investor that has ever lived? If he is throwing away 99% of all investing ideas because he can’t understand them, how am I not throwing away at least 99.9% of all investments?
First I tried to understand businesses that are just difficult to understand if you’re aren’t already familiar with the industry or business model. I have also invested in businesses that I felt like I didn’t completely understand. But now, I throw away companies more easily and invest in even a smaller percentage of the whole stock universe. I believe that this will help me prevent making investment mistakes through investing in companies where something unexpected happens because I didn’t really understand it.
Additionally, when a company is difficult to understand, you either may not be able to accurate select the critical variables for this company to succeed or there are just way too many variables to take into account. In either way, you are much more likely to make mistake and lose money on an investment than when you invest in one where you do understand which few variables will be key to its performance.
That’s it for today. Thanks for reading and see you next time!