Howard Marks highlights a pension fund that, by never ranking above the 27th or below the 47th percentile annually, achieved 4th percentile performance over 14 years. This mathematical paradox demonstrates that avoiding major losses is more powerful for long-term compounding than chasing huge, inconsistent wins.

While a pension fund's ultimate goal is hitting its absolute actuarial return, this is irrelevant for short-term evaluation. In the short run, performance must be judged relative to peers or benchmarks to account for the prevailing market environment.

The smooth exponential curve of compounding is a myth. In reality, it occurs in a world of shocks and uncertainty. True long-term compounding isn't just about picking winners; it's the result of having a robust process that allows you to survive the inevitable randomness and volatility along the way.

Historical analysis of investors like Ben Graham and Charlie Munger reveals a consistent pattern: significant, multi-year periods of lagging the market are not an anomaly but a necessary part of a successful long-term strategy. This reality demands structuring your firm and mindset for inevitable pain.

The highest-performing strategies often have extreme volatility that causes investors to abandon them at the worst times. Consistency with a 'good enough' strategy that fits your temperament leads to better real-world results than chasing perfection.

The effort to consistently make small, correct short-term trades is immense and error-prone. A better strategy is focusing on finding a few exceptional businesses that compound value at high rates for years, effectively doing the hard work on your behalf.

A 50% portfolio loss requires a 100% gain just to break even. The wealthy use low-volatility strategies to protect against massive downturns. By experiencing smaller losses (e.g., -10% vs. -40%), their portfolios recover faster and compound more effectively over the long term.

Investors rarely sell a fund for outperforming its benchmark too aggressively, but they should consider it. Research by Vanguard's John Bogle tracked the top 20 funds of each decade and found they almost always became significant underperformers in the following decade, demonstrating the danger of chasing past winners.

Even long-term winning funds will likely underperform their benchmarks in about half of all years. A Vanguard study of funds that beat the market over 15 years found 94% of them still underperformed in at least five of those years. This means selling based on a few years of poor returns is a flawed strategy.