On Compounding

Jul 30, 2023

The first rule of compounding is to never interrupt it unnecessarily. — Charlie Munger

Compounding is a fundamental principle of the universe. It’s not just about finance.

  • Compounding is most effective when you focus on what won’t change — information or things with a long half-life.
  • Compounding is Lindy, which makes it a real moat. Hard, but not impossible, to copy high year-over-year growth for one year.
  • Growth is valued at a premium in all environments.
  • Consistently undervalued. Not intuitive, no matter how much you understand the power of compounding. We remember losses more than gains (Loss aversion, Tversky and Kahneman).
  • A result of this is that we overestimate what we can achieve in the short run and underestimate what we can achieve in the long run (Amara’s law)
  • Happens slowly, then all at once.