Book Summary (11/31) : The Joys of Compounding

Chapter 11 : The Key To Success In Life Is Delayed Gratification

1. People who arbitrage time will almost always outperform. The first order thought of instant gratification is a crowded path, ensuring mediocre results at best. Delayed gratification, which requires second order thinking, is less crowded and more likely to get results.
2. How much insight does one need in a lifetime to be a successful investor? Not much, as Warren Buffett explains: I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.
3. Long-term investors look for management teams that are willing to defer gratification. These teams are focused on building a durable economic franchise. They are focused on the longevity of the business. They are willing to forgo near-term earnings to increase long-term value.

• Consider the following quotes from Bezos that reflect the culture of long-term thinking at Amazon:

1. A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time—with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.
2. Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.
3. If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue.

Note : Investors in Adobe (which, as of October 2019, has delivered a CAGR of ~24% since its IPO in August 1986) had to undergo a period of thirteen years (2000–2013) during which they made nil return on its stock.

To make money in stocks, you need to have vision to see them, courage to buy them and patience to hold them. Patience is the rarest of the three.—Thomas Phelps