Why we interrupt compounding
We always adjust to current circumstances in a way that makes forecasting our future desires and actions difficult, resulting in the inability to capture long-term compounding rewards that come from current decisions.
Every ten-year-old boy wants to be a policeman, cricketer or film star when they grow up. Then they grow up and realise that playing cricket maybe isn’t the best career. So as a teenager, we dream of being doing engineering or medicine. Then we realise that working as an engineer is not as cool as we thought.
Point being- Things change. And it’s hard to make long-term decisions when your view of what you’ll want in the future is so liable to shift.
This gets back to the first rule of compounding: Never interrupt it unnecessarily. But how do you not interrupt a money plan – careers, investments, spending, budgeting, whatever – when your life plans change? It’s hard. Part of the reason people like Grace Groner, Sachin Tendulkar and Warren Buffett become so successful is that they kept doing the same thing for decades on end, letting compounding run wild. But many of us evolve so much over a lifetime that we don’t want to keep doing the same thing for decades on end. Or anything close to it. So rather than one 80-something-year lifespan, our money has perhaps four distinct 20-year blocks. Unfortunately, compounding doesn’t work as well in that situation.
There is no solution to this. But one thing I’ve learned that may help is coming back to balance and room for error. Too much devotion to one goal, one path, one outcome, one stock, one strategy is asking for regret when you’re so susceptible to change. Tinkering a bit in diverse areas may work just fine.
Not many of us know what stock to buy for the next 20 years. We just want to remain in equity for 20 years without blowing your capital. Being alive for 20 years in the market should be enough