25% Annualized Rate of Endurance
Why Extraordinary Returns Demand Extraordinary Restraint
There is nothing more glamorous than a 10X headline or news of a “big trade” achieved by some large or small firm, the well-known trader or a young whiz-kid.
However, one of the things I learned, from one of the greatest investors I’ve known, is just how hard it is to repeat success (if by “success” we mean making a killing on some financial trade).
As soon as you lock down the perfect trade, it’s time to look for the next! That’s when bravado begins to give way to doubts.
So, how does an investor achieve stellar-like returns (outpacing “market” returns) without having to compile a series of big short-term bets?
Long-term investing.
I know, I know. Slow, methodical, boring and nerve-wracking. It lacks the obvious glamour, noise, dopamine hit and (potential) accolades to be found in trading. It relies on the power of long-range compounding rather than a compilation of short-term bets.
Honestly, compared to some trades we read about, even a 25% compounded annual growth rate (CAGR) does not feel that extraordinary.
That is, until you stop and look at what 25% can do over 10 or 20 years.
$1,000 compounding at 25% over 20 years becomes $86,000. That is an exceptional outcome.
And here is the uncomfortable truth: achieving such a result as a self-directed investor is not primarily a matter of financial brilliance. It requires temperament and psychological endurance under conditions that are specifically designed to break it.
Roughly speaking, only a small percentage of publicly traded stocks go on to deliver returns in this range over multi-decade periods (think, NVDA 0.00%↑, AAPL 0.00%↑). That alone imposes a brutal constraint.
You are not searching for “good companies,” but extreme outliers. And, even if you identify one of these rare businesses, the probability that you will buy early enough, size it meaningfully, hold it through good times and bad, and primarily avoid selling prematurely is very low.
The true scarcity is not the stock. It is the behavior required to own it!
I reached a point (thankfully, early in my career) where I questioned whether I truly believed what I was telling clients. Did I have the sort of behavioral attributes needed to invest for the long-run?
Over the years of investing and helping others to remain invested, I began to experience a shift in my thinking. I slowly but eventually accepted a few things:
I cannot control what markets do. (Duh. But yeah, I had to accept that long-term investing means going through bad markets without losing my cool.)
I cannot control my ability to identify the next “extreme outlier” as much as I think I can. (Know you can always be wrong.)
I can control (or at least, “manage”) my behavior or temperament around investing and money. (Despite what headlines are screaming.)
And, my psychological and emotional restraint must be practical and pragmatic (not merely conceptual and idealistic). I have to believe in something. Have conviction. And with that conviction, act as an emotional non-participant.
Having worked in tech before moving to the investment industry, I was pretty certain about the category in which I would focus the core of my investments (while still incorporating a counter strategy within a portfolio).
I dabbled in tech stocks and funds. But I wasn’t faring too well with bottom-up stock-picking. (More on that another time.)
One day I was chatting with colleagues when an exuberant neighbor began sharing about his experience with trading leveraged ETFs (in his personal portfolio). Not only were they new to me, but our firm would never promote such high risk financial instruments.
I listened intently and then began to do my own analysis of how they work, their risk and effectiveness.
With money I could afford to lose and with a mindset solely focused on long-term growth, I made my move. I invested a “manageable” amount in a 3x leveraged Technology Bull ETF (TECL 0.00%↑ ).
Only, I decided to go against the grain. I decided to go long (ie., buy and hold) in a leveraged ETF.
Now, at the time of this publication, about 15 years later, the position is up over +15,000%*. And it still has room to run.
(*Note 1: Buying, much less holding, a leveraged product is NOT a recommendation, by me or anyone else familiar with this type of instrument. Both volatility and “volatility drift” are reasons to be cautious with leveraged products. They are intended for short-term trading and only by accredited investors. Please review the disclaimer below and here.
*Note 2: My purpose here is not to boast, tout, or to recommend investments; but to share my experiences in investing and to explore what’s behind investing “norms” that seem “obvious.”)
But here’s the real story beyond the actual trade itself:
I made one trade with funds I could afford to lose.
I waited a long time for the “payoff” (although I am not about to sell, I have rebalanced).
It was and is an excruciating test of endurance.
During that time, I experienced several bear markets, many more corrections and plenty of big swing days. All normal market activity.
Just in case you may have missed the point, this >25% CAGR includes bear markets!
Regardless, my approach seemed simple enough. Perhaps even naive. I anticipated strong, long-term gains in technology. Given that conviction, why wouldn’t I leverage?
The answer to that question is this:
leverage amplifies volatility; and volatility weakens, if not destroys, resolve.
(Why volatility does that to us is also a subject for another time.)
Obviously, I can’t manage volatility. However, knowing I can turn volatility into my advantage, I chose another strategy.
My primary task was (and is) building endurance by managing my resolve, restraint and patience, not the investment position, per se.
Much like long-term investing, endurance has a way of compounding.
Over the years, there were huge periods of gains and crushing periods of reversals! Both ends of the pendulum required a consistent recalibration of expectations; dampen elation and hubris during upward swings; deflect and/or deflate rampant fear during downswings.
However, the benefits of withstanding both good and bad times far outweighed the struggle. Though not merely in financial terms.
Along the way I built emotion-management muscle. I acquired a true appreciation for how compounding works. I gained much greater clarity on what drives markets and how to avoid the noise.
Ironically, I hadn’t even considered the return on this or other positions in my portfolio. It became irrelevant because I wasn’t competing with anyone.
I spent a large portion of time teaching myself to restrain from “over-watching”, such that I organically learned the practice of “drama-avoidance” (which mostly entailed filtering “noise”). Instead, I consolidated and channeled my energy towards achieving restraint.
Restraint may seem like an exercise in applying large-scale control. Yes, there are periods of teeth-gritting; but, I discovered that restraint actually scales and endurance is produced in micro-doses.
Ultimately, restraint (and the endurance it helps to produce) has more to do with staying true to convictions. Meaning, as investors, we must know what our convictions are before we can exercise restraint.
Convictions and the resolve needed to see them through will change over time. In my case, what began as an experiment based on a belief in technology, evolved into a set of beliefs about how to invest with extraordinary endurance. A work still in progress.
And as strange is it may sound, compared to the monetary gains, the greater outcome of this experiment was learning to endure. It’s actually a larger payoff because endurance is applicable to so many areas of life.
And much like long-term investing, endurance has a way of compounding.
This publication is for brains, not bets. The Other Side of Obvious shares ideas, stories, and general financial information - not personalized investment, tax, or legal advice. Investing comes with risk (including losing money). Talk to a pro before you act. Please take time to read these important disclosures before you get started.