Thread by @heymaxkoh

15 lessons from Joys of Compounding by @Gautam__Baid

This was my favourite investing book of 2020.

I've read it twice.

And plan to re-read it again.

Many lessons on life, investing, and becoming a better human being.

1. Importance of revenue growth

"Long-term revenue growth—particularly organic revenue growth—is the most important driver of shareholder returns for companies with high returns on capital"

2. Zoom out

"The very fact that most of the talent and resources on Wall Street are focused on competing in the short-term arena of the next few quarters is what leads to a big opportunity for those who can look 3-5 years out and quietly consider the bigger picture."

3. Structure your portfolio to reduce fear

"There’s no room for facts when our minds are occupied by fear.

Once fear about one aspect gets into the minds of people, they can’t see other things some distance away."

4. Gross profit margin tells you a lot

"Focus on the trend over the years.

If it is fluctuating a lot in a cyclical manner, then it means that the company does not have pricing power over its customers and is not able to pass on increases in raw material cost."

5. Not all stocks with low multiples are good investments

"Most of the time, switching from a high P/E stock to one with a low P/E proves to be a mistake.

Value traps are abundant and all-pervasive. I have learned to respect the market’s wisdom."

6. Not all stock corrections are equal

"An irrational fall in price makes a stock cheaper.

A rational fall in price makes a stock more expensive.

Value traps are businesses that look cheap but actually are expensive."

7. No such thing as wasted effort

"In investing, all knowledge is cumulative, and the insights we acquire by putting in the effort today often help us in a serendipitous way at some time in the future.

Work hard today to let good luck find you tomorrow."

8. You don't need 10 baggers to do well

"In my investing experience to date, I have not yet had even one “ten-bagger,”.

Multiplicative compounding of smaller multibaggers many times over helped me realize my dream.

I experienced the joys of compounding."

9. ROIC is not enough. You also want ample re-investment opportunities

"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."

10. Cost advantage is a powerful moat to have

"The more customers that buy from a low-cost producer, the more its cost advantage moat widens over time, creating a “flywheel” that accelerates as the business grows."

11. Stock price swings wildly. Business value moves slowly.

"Always remember: stock prices randomly fluctuate every day, sometimes wildly on either side, but business value changes very slowly."

12. Given a long enough time frame, you can still get wealthy without home runs

"We should not aim for the highest possible returns in the shortest period of time.

but rather we should seek above-average returns over a long period of time with the lowest possible risk."

13. Don't just consider probability of failure. Consider the magnitude too.

"If bankruptcy is a potential risk, then it doesn’t really matter what the upside possibilities are.

Certain bets in life, regardless of how asymmetric they appear, should be avoided at all costs."

14. Before you start paddling hard, make sure you are headed in the right direction

"In both careers and in investments, it helps enormously to pick the right train, that is, to choose a field with long-term secular growth"

15. Human beings are wired to react to sudden changes in the environment...

Not to slow, gradual ones.

But slow changes, both improvements and deteriorations, are magnified over time, even though they are barely noticeable over short periods."

That's it!

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