I read the following from Morgan Housel’s /Collaborative Fund blog:
Howard Marks once talked about an investor whose annual results were never ranked in the top quartile, but over a 14-year period he was in the top 4% of all investors. If he keeps those mediocre returns up for another 10 years he may be in the top 1% of his peers – one of the greatest of his generation despite being unmentionable in any given year.
So much focus in investing is on what people can do right now, this year, maybe next year. “What are the best returns I can earn?” seems like such an intuitive question to ask.
But like evolution, that’s not where the magic happens.
If you understand the math behind compounding you realize the most important question is not “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”
That’s not to say good returns don’t matter. Of course they do. Just that they matter less than how long your returns can be earned for. “Excellent for a few years” is not nearly as powerful as “pretty good for a long time.” And few things can beat, “average for a very long time.” Average returns for an above-average period of time leads to extreme returns.
“The only thing that matters is where you are in the long run,” Marks said.
That’s the second lesson: Less focus on change, more focus on the exponent.
I thought it was an interesting idea that if you invest with average returns, but do so for an above-average period of time, you can be within the top 4% (or even 1%!) of investors over your whole investing career.
The whole article is here, if interested:
Nature Shows How This All Works · Collaborative Fund