Lee Kuan Yew, founder and first prime minister of Singapore, always instructed, “Find what works and repeat it.”
Charlie Munger took that directive and distilled it to its essence:
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
Repeat What Works!
Then pronounced it …
The Fundamental Algorithm of Life
Mull that over a few times.
And, of course, Evolution!
Darwinian Evolution is just Nature repeating what works over billions of years: mutation, diversification, exponential growth, selection, adaptation.
It is so difficult to imagine that random combinations within a chemical stew sparked the dawning of life on earth.
And over billions of years the most primitive organisms evolved into…us.
By just repeating what works.
The Fundamental Algorithm is not intuitive.
Why else would Darwinian Evolution—the ultimate application of the Fundamental Algorithm--arrive so late in intellectual history and encounter so much resistance?
We all tend to repeat, but for intuitive reasons.
We repeat if it feels good.
If it feels right.
If everybody’s doing it.
If we were told to do it.
If we’ve done it before.
And we keep doing it.
We even overvalue repetition as consistency and prefer to remain consistently wrong rather than actually right.
So remember the words of John Maynard Keynes, when accused of waffling:
“When the facts change I change my mind. What do you do, sir?”
Rationality vs. consistency.
Obviously rationality is better.
Yet rationality must fight to win the day!
When something doesn’t work we still repeat it, expecting it will work this time, as though we were starting a car in the dead of winter.
Or we make it bigger.
Or spend more money.
Hoping and expecting it to work.
Like raising our voice to someone who does not speak English, hoping they will understand.
Hope is not a strategy.
But the Fundamental Algorithm is a “can’t fail” proposition.
So let’s apply it to wealth creation.
Exponential growth and compound interest work slowly and surely over time. But they are not intuitive.
I’ll prove it.
If you doubled a penny every day for the month of July what would you get?
A bag of pennies, right?
Only ten million dollars! $10,737,418.23, to be exact.
Don’t believe it? Here’s the proof:
Day 1 0.01
Day 2 0.02
Day 3 0.04
Day 4 0.08
Day 5 0.16
Day 6 0.32
Day 7 0.64
Day 8 1.28
Day 9 2.56
Day 10 5.12
Day 11 10.24
Day 12 20.48
Day 13 40.96
Day 14 81.92
Day 15 163.84
Day 16 327.68
Day 17 655.36
Day 18 1,310.72
Day 19 2,621.44
Day 20 5,242.88
Day 21 10,486.76
Day 22 20,971.52
Day 23 41,943.04
Day 24 83,886.08
Day 25 167,772.16
Day 26 335,544.32
Day 27 671,088.64
Day 28 1,342,177.28
Day 29 2,684,354.56
Day 30 5,368,709.12
Day 31 10,737,418.23
If you are shocked you are in good company.
Albert Einstein called compound interest the Eighth Wonder of the World.
He also said that those who understand it earn it.
Those who don’t pay it.
That’s how people living paycheck-to-paycheck get sucker-punched each month by compound interest on credit card debt.
Compound interest is a “can’t fail” proposition for building wealth unless it’s interrupted.
And compound interest works way better than trading stocks, which fails for most people most of the time. But people still keep trading, repeating what rarely works.
Compounding is less fun than gambling because it’s not exciting.
But compounding works and gambling doesn’t.
If you invested only $5 per day in a tax-sheltered S&P 500 index fund for the past 50 years you would have compounded at 10% annually. Today, you would have well over $2,000,000!
Talk about easy money!
Easy money is built slowly and surely on compound interest.
Charlie Munger calls it “sit on your ass investing.”
But how do you get that 10% market average?
Go back to Evolution!
There are an estimated 8.7 million species in the world.
Many more species dead and gone.
Does Nature like to diversify? You bet she does.
Evolution—Nature’s ultimate application of the Fundamental Algorithm— is built upon the pillars of diversification, competition and exponential growth (compound interest).
Individual species and individual creatures live and die, come and go. But the great diversity of life flourishes and always will.
Likewise a diversified index fund guarantees both the growth and survival of your wealth just as Nature does for our abundant planetary life.
Few people can reliably pick winning stocks.
But an index fund doesn’t miss the winners—as the winners emerge they join the index.
And though you won’t beat the market you won’t waste time trying.
And you’ll end up rich anyway!
Then you can devote yourself to things way more important than money.
Because money is only really important if you don’t have it!