Combat indecision and emotional attachment by pre-committing to sell an investment if it fails to meet a specific metric (the state) by a specific deadline (the date). This creates a pre-commitment contract that closes long feedback loops and prevents complacency with underperforming assets.
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.
The asymmetrical nature of stock returns, driven by power laws, means a handful of massive winners can more than compensate for numerous losers, even if half your investments fail. This is due to convex compounding, where upside is unlimited but downside is capped at 100%.
Scott Barbie's value fund experienced a massive drawdown before a 91% rally. This illustrates that systems with high variability show the strongest regression to the mean. If your investment theses are sound, a period of severe underperformance can be a leading indicator of a powerful recovery.
Allocate more capital to businesses with a highly predictable future (a narrow "cone of uncertainty"), like Costco. Less predictable, high-upside bets should be smaller positions, as their future has a wider range of possible outcomes. Conviction and certainty should drive allocation size.
Applying industry-average growth rates to an emerging category leader is a critical mistake. A business like Shopify, with a powerful flywheel and network effects, is a power law winner that defies regression to the mean of its stagnant competitors. Its performance is simply not comparable.
Business growth isn't linear. Scaling up introduces novel challenges in complexity, cost, and logistics that were non-existent at a smaller size. For example, doubling manufacturing capacity creates new shipping and specialized hiring problems that leadership must anticipate and solve.
WeWork created "Community Adjusted EBITDA," a metric that conveniently excluded core costs like rent and salaries. This farcical KPI incentivized top-line growth at any cost, masking massive unprofitability and ultimately destroying shareholder value. Be wary of overly creative accounting.
Compounding has positive asymmetry. A stock can only lose 100%, but it can gain multiples of that. This means a portfolio with one stock compounding at +26% and another at -26% doesn't break even over time; the winner's gains eventually dwarf the loser's total loss, leading to strong positive returns.