There’s nothing investment-types agree on more than the power of compounding. Over at Investment Masters Class they have a whole page devoted to quotes about compounding from Warren Buffett to Ed Thorp. An example:
“The effects of compounding even moderate returns over many years are compelling, if not downright mind boggling.” Seth Klarman
The one thing that participants in the meme-stock trend are not interested in is compounding. Many took big swings at stocks like GameStop. So it’s not altogether surprising some investors won big, while others lost big, in the frenzy that followed. As Jason Zweig in the WSJ wrote:
My own take is straightforward. The new messiahs of momentum, with their charisma and huge followings, can unite the buying power of scattered investors better than anyone who came before them. For a crowd of followers to be wise rather than foolish, though, those who lead it must have an unusual information edge.
I supposed it’s human nature to want to hit it big. This might due in part to a misunderstanding of compounding. As Morgan Housel at Collaborative Fund writes:
Compounding is not intuitive, so it’s systematically overlooked and underappreciated.
Maybe we should re-brand compounding as accumulating ‘little breaks’? In investing little breaks would include every time a stock paid a dividend, a bond paying its coupon, an investment expense avoided or a company buying back some stock. The kind of thing that doesn’t make headlines. The kind of thing that happens every day in the markets. The kind of thing that doesn’t end up on CNBC.
Seth Godin wrote about the difference between big breaks and little breaks in this post. The analogy between little breaks and compounding isn’t perfect, but in my mind works. Godin writes:
Little breaks don’t like being waited for the way big breaks do, because while you’re waiting, you’re wasting the little breaks you’ve already gotten.
Don’t waste your little breaks. Because as the GameStop saga shows, you can’t always count on a big break playing out the way you want them to.