On Compounding

The first rule of compounding is to never interrupt it unnecessarily. — Charlie Munger

Compounding is a fundamental principle of the universe. It’s not just about finance. 

• Compounding is most effective when you focus on what won’t change — information or things with a long half-life.

• Compounding is Lindy, which makes it a real moat. Hard, but not impossible, to copy high year-over-year growth for one year. 

• Growth is valued at a premium in all environments.

• Consistently undervalued. Not intuitive, no matter how much you understand the power of compounding. We remember losses more than gains (Loss aversion, Tversky and Kahneman).

• A result of this is that we overestimate what we can achieve in the short run and underestimate what we can achieve in the long run (Amara’s law)

• Happens slowly, then all at once.