210. the Hero variable (Compounding)
#MakingBetterDecisions, #Goals, #focusonwhatmatters, #Wealth, #Careers
“In business, you don’t have to do extraordinary things to get extraordinary results. You have to have a sound approach, but you don’t have to be brilliant.” — Warren Buffett
In the second edition of this short series on Compounding, I explore the most romantic variable in the equation for compounding — “r”, the return rate. In a successful compounding journey, a number of things contribute to the success but it is the return rate that tends to get the most attention. In financial matters, return rate is used to measure the worthiness of financial instruments/funds and fund managers. In case of career journeys, it is the “promotions” that tend to hog the limelight. In case of businesses, profit margins tend to appropriate quite a bit of glory. For this reason, I consider “r” as the hero variable.
“You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long, time.” — Charlie Munger
Fascination for Heroes
We humans have a great fascination for heroes. We love larger-than-life hero characters in the movies, books, folklore and in every other aspect of our lives. We celebrate the world’s fastest runners, best athletes and sportspersons, popular superstars and entrepreneurs. Their extraordinary achievements spark our imagination in the art of possible. They motivate us to strive for better things in our own lives. But a key aspect of these extraordinary achievements is that these storied accomplishments generally tend to be exceptions; not the rule. The vast majority of humanity does not come even remotely close to these heroic achievements.
Consider the following media coverage on the life of one Ronald Read:
”Ronald Read, a retired gas station attendant and janitor in Vermont, passed away in 2015 at age 92. Nothing about his life or death was extraordinary, except for the fact that after he died, his estate was revealed to be worth $8 million.
Read’s friends remember him driving a second-hand car and using safety pins to hold his worn-out coat together. He even continued to cut his own firewood well after his 90th birthday.
“I’m sure if he earned $50 in a week, he probably invested $40 of it,” said Read’s friend and neighbor, Mark Richard, according to CNBC.”
Where is heroism in Ronald’s story? His life seems as ordinary as it gets. Even the most remarkable highlight of his life was discovered only after his demise. He was not spoken about when he was alive.
“It’s not the big things that add up in the end; it’s the hundreds, thousands, or millions of little things that separate the ordinary from the extraordinary.” ― Darren Hardy
Bragging our own achievements
Many of our goals may seem important to us not so much because of their meaningful personal relevance but because, many times, they give us a chance to brag, either overtly or covertly. If you are shaking your head disagreeing with this assertion then you are not alone. Even I could not completely agree with this statement as I was writing it down. Honestly reflect on the motivation behind your own goals — it is highly likely that you may not find a completely rational motivation for many of your active goals. For example, take the case of that coveted title/designation that you are going after at your workplace. What need or want does it satisfy?
Once you have secured a level of assets in the context of your expenses and financial goals, what need or want will extra money satisfy. But this does not stop many from going after making more money — at times, at the expense of their health.
I think deep down, we nurture a primordial need to be better than others. We have an evolutionary imperative of being competitive so that our genes pass down preferentially. Perhaps, as a result, we are hardwired to be in the constant pursuit of being seen as better than others. This manifests in the form of competition with others — many times with those who may not even be playing our game. We look for fit (not necessarily in “athletic” sense but the sense of being good at adapting and surviving) mates. Our potential mates are also driven by the same imperative. They also look for fittest possible mates. So, you would like to mark yourself out as a fit mate. Fitness takes various forms. In some contexts, it is the physical aspects like being strong, buffed, athletic, toned etc and in other contexts, it could be intelligence, wealth, power etc and on rare occasions, it could be wisdom too. Only the fittest survive and we want to be the fittest and we try to manifest this through winning. You may want to show off that you are better than others — it does not matter if the other person is competing with you or not.
“It never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles.” — Charlie Munger
In the context of compounding equation, we seem to be naturally predisposed to going after bigger “r”. Our genetic wiring makes it compulsively so.
What is the problem in trying to maximize “r”? It is actually important to maximize “r”. But it can be self-defeating if you do not recognize the limits to maximizing “r”. After all, you can only do the best that you can and your best may not be good enough. The returns on your efforts do not depend on your efforts alone. A lot of other things have to fall in place too. In pursuit of high returns, you may end up with a risky fund. And risk may materialize but not the returns.
Bottomline
“The point of investing, after all, is not to have a great story to tell; the point of investing is to make money with limited risk.” — Seth Klarman
The most alluring of the parameters that affect the compounding equation is the return rate. There is something heroic about the return rates. High returns can boost one’s ego. The only problem is that going after high returns is generally risky. More often than not, the pursuit of higher returns leads to sub-par results. In the long run, occasional fantastic results may not result in overall great results. Compounding equation assures that even slightly better than average returns achieved consistently over a long period will result in superior overall result. So, do you want to be a hero or like to achieve your goals?
***************************
Thanks for taking time to read this article. In this newsletter, I share my learnings that could
help you improve your decisions and make meaningful progress in your life. I try to share stuff that I have personally experienced or experimented with.
To follow me on LinkedIn, click here
