@ballbantryCompounding is the 8th wonder of the world. It has...

@ballbantry

Compounding is the 8th wonder of the world. It has the power to generate enormous wealth over the long term. However the human brain is not accustomed to it. Most feeble brains are used to looking at things in a linear fashion but nature is anything but linear. Anything that grows in % terms exhibit logarithmic growth from the humble snowflake, bacteria, trees, stocks, interest investments etc and all the way up to the movement of the largest celestial bodies in the universe.

Compounding is just one part of broader strategy... In the game of investing It is always prudent to have $$$ in the sidelines.Taking my 3 portfolios as an example. I have a further $3m in the sidelines for when opportunity presents itself. Your mileage will vary wherever you are in your investment stage but the golden ratio have served me well for 25 years! Apart from when I was just starting out, there's only really been 2 occasions where I was all in...GFC and after Covid madness of 2020. The aim of the game (for me at least) have always been to have a portfolio in compound accretion. Any cash in excess of that I'm happy to keep in the sidelines for a rainy day. Retail investors needs to realise that all things you are good at comes to naught if you don't have the $$ at hand and the conviction when the opportunity presents itself.

Not only that. It is much easier to control these investment traps when you have $$ in reserve or need to maintains $$ in reserve as a rule of thumb.
-Loss Aversion. Humans feel more pain from losing than joy from winning. But if you have $$ in reserve there is no point selling a great company at a loss. If you sell you are just going to add to your cash stockpile.
-Fear of the unknown. The human brain experiences intense anxiety when faced with uncertainty. Having cash in reserves takes a lot of uncertainly and hence lowers the anxiety driven by uncertainty. In fact you actually look forward to market crashes and/or the stock you like crashes.
-Fear of missing out/Over-confidence. Not only is our brain prone to feat and anxiety but also over-confidence, a dangerous characteristic for any investor. But if you have $$ in reserve you can withstand not having to want for a win for extended periods. I'm running a marathon while the majority likes to run the 100m sprint. I'm pretty sure that over the long term I will win.
-Confirmation bias. As humans, once we have made up our mind on an issue, we seek out evidence that supports our assumption and ignore contrary evidence. But if you have $$ in reserve or need to keep $$ in reserve as a rule; you tend to evaluate investment decisions on a finer level. You tend to ask yourself the question of buying now or buying when the market sh1ts itself. Knowing that market sooner or later will always sh1ts itself.

So to recap... Compound Accretion and $$$ in reserves and finally... Circle of Competence. That circle doesn't have to be that big. As long as you really understand what is in it. There is no better teacher than experience. Around Feb last year I posted Post #: 72639367 I have lived through and owned CBA in its massive bull run post GFC ($24 to $96 or 300% in 6 years) and if that is anything to go by; post COVID Inflation event is yielding the same euphoric FOMO on the macro view... $53.50 to $160.5 in the 6 years, keeping note that we are 4 years into this run. History does not repeat itself but it does rhyme... You don't get to formulate CBA investment views like that unless it is inside your Circle of Competence.

If you can execute on these 3 strategies, booms and busts become normal. If you don't position for it you will join the majority of headless chooks in the market whenever it happens... I look forward to market crashes