Critical Chance

Tag: performance

  • The Power of Consistency

    The Power of Consistency

    Warren Buffet has an interesting principal he follows. 

    At the end of each year, a company gets to decide what to do with their earnings. Some companies issue a portion of the money to their shareholders; this is called a dividend. Most investors love it, in fact some design their portfolios to exclusively invest in companies that provide annual dividends. Warren on the other hand? He HATES investing in these companies.

    Why? When you receive a dividend, you realize gains, which means you have to pay taxes each year.

    Warren would rather the money was reinvested into the business to help it grow.

    First off, this allows him to avoid taxes for as long as he can.  But if we remember the rules of compounding, it allows his money to stay in the system and work even harder. Warren wants to be taxed only once, at the very end when the journey is over, not throughout.

    Buffett principal #2: Never take your money out

    The Aggregation of Gains

    The first rule of compounding is to start as early as you can. 

    But once your money is in, we want to optimize towards growth – this means paying as little as possible. 

    “The objective is to buy a non-dividend-paying stock that compounds for 30 years at 15% a year and pay only a single tax at the end of the period. After taxes this works out to a 13.4% annual rate of return.

    Charlie Munger, 1998

    If you invested $10,000 with Warren Buffett, at his annual rate of return of 23%, the following chart shows you the amount you’d have in 30 years, based off if you paid taxes each year versus allowed the money to keep compounding. 


    Assumes 23% compounding annual rate, blue line allows money to compound, red line removes taxes at 35% rate each year
    It’s worth noting that these are extremely high rates of return, and the average investor can expect to get closer to 8% ARR

    Breaks vs BRAKES

    Breaks are healthy – they allow us to recover and admire our results.

    Trouble comes when we allow a short break to turn into hitting the brakes (that is, stopping completely). 

    Here’s what what I mean:

    • Health – When we feel physically in shape, we decide to stop exercising – a few days becomes a few weeks
    • Learning – When we believe we’ve mastered enough, we decide to stop learning – binge reading becomes binge television
    • Relationships – When we sense our connections are strong, we decide to stop building them – personal texting becomes singular social media posting 

    Warren’s principal reminds us of the power of pausing too often or for too long.

    Once you stop showing up, you stop gaining. 

    Keep It Going

    You’ve decided to start (that’s great!), but don’t underestimate the importance of continued hustle. The laws of compounding don’t care if you’ve had a bad day, or it’s a busy week.

    When we decide to follow through, we continue to gain, period.

    So wherever you are, keep it up, and just like Warren you too will enjoy the aggregation, not of a single year, but an exponential 30 years. 

    Getting up when others won’t is what makes all the difference. 

    And who knows, that determination might be worth an extra $2.8M dollars, in whichever domain you’re compounding.

    Post inspired by:

    Buffettology: Unexplained Techniques That Have Made Warren Buffett by Mary Buffett

  • Impossible records

    In the 1950’s after rigorous mathematical computations of the physics of our anatomy, experts concluded that it was impossible for a human to run a mile in less than 4 minutes.

    A physical impossibility, scientists said. Then along came Roger Bannister, who in 1954 broke the barrier with an official time of 3:59.4

    Suddenly, the floodgates opened. Within a month, Roger’s record was beat. Within the next four years, runners would continue to oust each other. Today the record stands at 3:43.13

    We tend to look at averages to determine what is attainable. Truth is, we do not know the limits of human potential. Our brains change in response to our actions and circumstances.

    When we bring talented people together our baseline for achievement rises and suddenly we’re all breaking records once deemed “impossible.”

  • Forward vs. backward looking goals

     

    Written on February 22nd, 2018

8 minute read

    Forward vs. Backward Looking Goals

     

    We tend to confuse the two and that’s a big mistake.

    If you’re like myself, when you set your most ambitious personal goals, they tend to sound something like this:

    • Appear on the Forbes, ‘[insert age] Under [insert age] List’
    • Get promoted at work
    • Increase my net worth to $XX

    What do they all have in common? These are all backward looking indicators. In other words, they are signals that you’re doing well, but in the past. While achieving these accolades does correlate with success, they aren’t predictive of future success. Rather, they are proof that success has already happened, in the past.

    Your goals should really sound more like this:

    • Learn a new (seemingly unrelated) discipline
    • Embrace a new positive habit backed by science
    • Reach out to non-local friends more regularly

    The difference? These are all forward looking indicators; they don’t show off as accomplishments in the typical way we view “success.” Yet, if you do any of these things, it’s easier to predict your performance in the future. Following through on these goals won’t get you a celebrated medal, but they are the positive tactics that actually get you there.

    Learning from successful people 

     

    What do Warren Buffett, Mark Cuban, and Bill Gates have in common? They are vivacious learners. They dedicate many hours each day to reading about new subjects, because it challenges their mindset and allows them to connect independent ideas. That’s a forward indicator – agile mental models produce novel ideas but will never receive an accolade for habit itself.

    What do they also have in common? They are all Billionaires. Their net worth continues to climb and is a testament to their consistent ability to keep growing as individuals, entrepreneurs, and thought-leaders. That’s a backwards indicator – it reflects back on their total economic output to date, in the past.

    That’s the formula.

    The most powerful forward indicator is happiness

     

    Compared to their neutral or stressed counterparts:

    • Doctors are 19% more accurate at diagnosing their patients
    • Sales people are 37% better at closing
    • Operationally, we can be up to 31% more productive

    That’s just the beginning; there are studies that show we are more creative, better at problem solving, and more resilient and innovative when we are happy versus neutral or stressed. *

    When we increase wellbeing in the present, all of our our future outputs rise. We are a product of our environments. So, elevating these inputs also helps those around you; your family, friends, and co-workers. Start with happiness and finish with more success.

    We should be challenging our employees and organizations to set forward looking predictors

     

    • How are you going to push yourself to self-learn this year?
    • What’s the one positive habit you will commit to practicing this quarter?
    • When will you find time to connect with your network this week?

    Ignore the accolades, because they come later.

    Remember, when our team commits and crushes the small stuff, we need to celebrate too. Our brains are wired for short-term feedback loops, which makes forward predictors hard to set and follow through on. It’s easy to choose a well-known award to gauge success, but it’s the abstract and consistent daily habits that really produce it.

    By adjusting our measuring stick of success, we can elevate everyone around us. Eventually producing more backward predictors that we know and love.