Value Investors Tribe

Author: Gautam Baid

The Joys of Compounding by Gautam Baid is a comprehensive stock market education guide for anyone who’s starting to learn about investments as well as for anyone who has been investing for a while. Gautam Baid skillfully articulates the lifelong learning required for investing as well as documents the essentials of investing in common stocks. In this part 3 of decoding the book we’ll summarize three important habits and mental models required to succeed in stock investments.

1. Checklists are Key: Gautam Baid explains the importance of checklists in investing. Charlie Munger has spoken multiple times importance of checklists and Gautam’s ideas of checklists are more or less influenced by the same concept. Good checklists are brief, precise, efficient and easy to use. Each investor needs to develop its own personal checklists so as to avoid the bias an investor is subject to. Blind spots and biases for each investor are different so copying checklists of other investors do not help.
2. Power of Incentives: Each individual, no matter what the task, is implicitly or explicitly driven by the incentives underlying. To understand and analyze business, it is key to understand what the underlying incentives that drive the organization are. Management running the business which is incentivized to make business grow, make moat wider, create shareholder value are the businesses that yield high returns in the long run. One of the most well management company is Berkshire Hathaway and it is helpful to understand how incentives are structured.
3. Understand Limitations of Math: Gautam explains how use of math is important but not everything can be explained by numbers. Gautam terms this chapter as “Always think about Math, but avoid Physics envy”. Physics envy is the term coined by Charlie Munger which basically means human bias to look for precision where none exists. This is a critical bias to overcome while studying investments. What the business will earn in next quarter or next year is rarely important however investors spend most of the time analyzing it using complex financial models. Gautam Baid recommends thinking about long term and make rough predictions which makes the decision to buy business or not obvious.  

This part 3 of summarizing important concepts from Joys of Compounding is to highlight some of the insights shared by Gautam Baid to be a successful investor. I highly recommend reading the book for some more interesting insights and to sharpen your skills.

Disclaimer: The content in this blog is purely for educational purposes. We do not claim any copyright of the book Joys of Compounding, all rights reserved by the publisher and the author of the book