The Joys of Compounding by Gautam Baid
When we hear the word "compounding", our minds often gravitate toward its financial implications, such as the growth of wealth and returns. However, compounding extends beyond finance and applies to life as a whole. A happy, healthy, and successful life starts with one small step at a time. The notions of "an overnight success" or "a high quality life" are frequently misleading, as they usually conceal years of unrecognized work and discipline. Gautam Baid, CFA explores these very principles in his book, "The Joys of Compounding", creating a bridge between compounding, value investing, and the important values of life.
🖊️ Gautam Baid is the Fund Manager and Managing Partner at Stellar Wealth Partners India Fund, a Delaware-based investment partnership modeled after the original Buffett Partnership fee structure. The fund, situated in the US, specializes in long-term, fundamental, and value-oriented investments in listed Indian equities.
My 🔑 takeaways:
It all begins with one great concept: lifelong learning. Baid covers this concept through the experiences of renowned names in the world of investing such as Ben Graham, Charlie Munger, Warren Buffet, Peter Lynch, and many more. They all have various different approaches to investing, yet share one common trait, they are all learning machines. Their constant curiosities and drive to learn have taken them to the top of the industry. It starts by reading just 25 pages a day, which is when the continuous learning takes off. As Baid affirms, "paradoxically, as you read more books, your pile of unread books will get larger, not smaller. That's because your curiosity will grow with every great read. This is the path of the lifelong learner."
Baid further delves into how one can leverage this lifelong learning to become a better investor. Strategies mentioned include using checklists or journals to make more rational decisions. Over time, reviewing your actions accumulates wisdom, as patterns begin to emerge, transforming you into a more rational and conscious investor. No matter the result of the trade, constant review and analysis remain essential. As Baid puts it, "Outcome is overrated. Process is underrated." Hence, acknowledging mistakes is pivotal for becoming a superior investor. Or in the words of George Soros: "To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes."
The basic principles stay the same, yet the market is forever changing. As Baid mentions: "Consider the S&P 500, one of the most frequently cited market indexes. On average, over the past fifty years, more than twenty companies are swapped out each year. Yet investors cite and treat the S&P 500 as if it were a monolithic, unchanging object. It clearly isn't. The constituents of the S&P 500 of 2020 are completely different from the S&P 500 of 2000". Thus it makes perfect sense that every investor is prone to making mistakes. No investor has a perfect track record, yet the difference between the best and the worst lies in the space of evolving perspectives, engaging in self-reflection, and the capacity to adjust – essentially, the essence of lifelong learning.
Furthermore, Baid states that the mindset of value investing can be applied to all facets of life. Value can be found anywhere, from the simple morning cup of coffee to relationships and stunning sunsets. The art is in appreciating the details and finer things in life, which often tends to be needlessly complicated. As Confucius wisely observed: "Life is really simple, but we insist on making it complicated." Simplicity is also needed to excel as an investor. One must simplify and eliminate distractions, which often consist of media, politics, and analyst opinions. Over the long haul, these factors hold little significance, as stock returns primarily correlate with a company's underlying performance. It is therefore crucial to determine what truly matters and what merely distracts us from establishing a long-lasting portfolio. Value is created over time, which often hides in those things that the masses overlook, or can not see because of the noise.
Additionally, patience and temperament emerge as two vital pillars of value investing. Fifty years ago, the average stock holding period on the NYSE spanned five years. Today, it barely reaches ten months. Consequently, as often claimed by long term investors, the best thing to do, is actually to do nothing. This concept further aligns with the fact that time in the market often outperforms timing the market. Baid brings this up through a study done by SageOne Investment Advisors: "Even though the market index in India (Sensex) went up 251 times between 1979 and 2017 (15.5 percent annualized returns), if you missed 7 percent of the best months or 1 percent of the best days, your returns would have been zero." Therefore patience and time in the market are key.
Hence, identifying a remarkable business is step one, step two is having the patience to hold onto it, for a very long time. According to Baid, to find such companies, analysis before taking action is of utmost importance. This analysis not only consists of quantitative aspects such as financial statements, cash flows, return ratios, operational efficiency, balance sheets, and management, but also the qualitative side. Or as Peter Lynch states, "Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage." Analyzing human behavior, integrity, management capabilities, and, most crucially, whether the business possesses a durable "moat" or competitive advantage over time. Over extended periods, stock growth closely mirrors the business's expansion, which is sustainable only with a long-lasting competitive edge.
Once a business has a so-called "moat", capital efficiency matters, a lot. The return on incremental invested capital for many years is what makes a great business. Then will one end up with the, as Baid states, Holy Grail of value investing: "businesses that consistently yield high returns on invested capital and reinvest a significant portion of their earnings at similarly high rates." These factors all lead to the nirvana of investing: "long-term ownership of competitively advantaged businesses with significant reinvestment potential, managed by excellent capital allocators and shareholder – friendly management teams."
💭 “The true value investor, who deserves my utmost respect, is somebody who devotes their life to their passion for reading. Nobody can spend their life studying for 50 years — which is what we do — if they don’t enjoy it.” - Francisco García Paramés
Final Word
In conclusion, to become a more proficient long-term investor, one must possess (or study) qualities such as lifelong learning, discipline, focus, rationality, consistency, simplicity, patience, analytical thinking, and philosophical reasoning. Furthermore: understanding human nature, studying history, recognizing patterns, acknowledging luck and chance, embracing randomness, relearning the known, critical thinking, and many more skills make you a better investor. It may seem like a long and tedious journey, but the payoffs are great, as nothing is more rewarding than exceptional investments, healthy relationships, and a higher quality of life overall. Hence, compounding can find relevance in every facet of life, and value investing teaches us skills that extend beyond the realm of finance.
The book covers a wide range of topics and concepts, making this so far the toughest book I have summarized. With 31 chapters, each unveiling a new facet, no two readings are alike. Hence, I encourage anyone with an interest in value investing and life long learning to start with this book. Please feel free to share your insights, and I am always open to recommendations!