Compounding: May You Never Die

This is not investment advice.

It is just a note on how I have recently come to understand compounding.

I used to think compounding was a word about making money.

Later, I realized it is really a word about not dying.

Most people do not fail at compounding because they cannot understand the math. Most people fail because they do not survive long enough to see compounding actually happen.

When people talk about compounding, they usually think of bank interest, dividend reinvestment, snowballs, and slowly getting rich. It sounds gentle. It sounds patient. It sounds like time quietly doing the work.

But the more I think about it, the less gentle compounding seems.

Compounding does not reward the smartest person. It does not reward the person who makes the most money in a single year.

It rewards one kind of person above all:

The person who is still alive.

A lot of people think compounding in stocks must mean owning more shares over time. For example, you buy a stock, collect dividends, reinvest those dividends, and your share count keeps increasing. That is certainly one form of compounding.

But in stocks, compounding does not have to happen only through quantity.

It can also happen through the asset base.

Suppose you bought 400 shares of Nvidia at a little over $80. Your initial capital was roughly:

400 shares × $80 = $32,000

Later, the stock rises to $160:

400 shares × $160 = $64,000

Your share count is still 400. But your asset base has grown from $32,000 to $64,000.

Now if the stock rises another 10%, your gain is:

$64,000 × 10% = $6,400

Not 10% of the original $32,000.

So just because your share count did not increase does not mean compounding did not happen.

Real compounding means the gains stay inside the system, and the next round of gains happens on a larger base.

But first, you have to make sure you do not get kicked out of the system.

1. What kills compounding is not a drawdown. It is being forced out.

Whenever people talk about long-term investing, someone will ask:

What about the dot-com bubble in 2000?

What about the 2008 financial crisis?

What about the 2020 pandemic crash?

What about the 2022 rate-hike valuation reset?

These questions matter. But for ordinary investors, it is very hard to dodge every black swan with precision.

You probably will not sell every top.

You probably will not buy every bottom.

The more important question is simpler:

After the crash, are you still alive?

Compounding does not fear one bad year.

It fears the moment after a bad year when your position is gone, your mindset is broken, your account is destroyed, and you no longer want to come back.

A market crash is not the scariest thing.

The scariest thing is when other people are only suffering mark-to-market losses, but you have already been removed from the game.

Getting liquidated with too much leverage.

Betting on an asset that goes to zero.

Having no cash and being forced to sell at the bottom.

Panic-selling at the worst possible moment and never coming back.

These are the things that truly kill compounding.

So the first principle of long-term investing is not to make the most money.

It is to not die.

Many people focus only on annualized returns. 10%, 20%, 30% — the difference looks enormous.

But the brutal part of compounding is not only the return rate.

It is the interruption rate.

If you get liquidated once, go to zero once, or leave the market completely once, all your beautiful annualized returns can be reset.

Compounding is not just a return-rate game.

It is an interruption-rate game.

2. Starting from 2000: three investors, three outcomes

Take the Nasdaq 100 as an example.

Suppose there were three people who all believed in technology stocks starting from the dot-com bubble in 2000.

The first person simply bought the Nasdaq.

He was unlucky. He bought right before the bubble burst.

Every time he opened his account, it was another brutal drawdown. The news was full of stories about the collapse of internet stocks. People around him were saying the internet was over.

Of course he suffered.

Of course he doubted himself.

For years, he may have felt that he had bought the top of the century.

But as long as he did not get liquidated, did not buy a basket of companies that went to zero, and did not panic-sell at the bottom, he was still at the table.

It was painful.

But it was not death.

Because as long as he remained in the game, the next technology supercycle could still matter to him.

The second person bought the Nasdaq with high leverage.

His direction may have been right too. In fact, he may have been even more convinced than the first person. He believed more deeply in technology. He believed the internet would change the world.

And in the long run, maybe he was right.

Technology did keep developing. The Nasdaq did eventually make new highs.

But the problem is that the path was too violent. He might have died before being proven right.

Even 2x leverage does not sound that insane. But in theory, if the underlying asset falls 50%, your capital is wiped out. In reality, because of maintenance margin requirements, many investors get forced out before the full 50% decline.

After the dot-com bubble burst, the Nasdaq fell more than 80% from peak to trough. During the 2008 financial crisis, it also suffered a very large drawdown.

That is the cruelest part of leverage:

It does not care whether you are eventually right.

It only asks whether you can survive until eventually arrives.

You may say you are bullish on technology for the next ten years.

But your account structure may only be able to survive ten weeks.

Right direction, wrong path, still dead.

The third person took profits too early.

He was flexible. Every time he made 20%, he felt smart. Every time he made 50%, he felt like he had won the game. When the market fell, he felt even smarter: See, I got out early.

In the short term, he did avoid some drawdowns.

But in the long term, he often avoided the real trend too.

Compounding requires profits to remain in the system. If you take them out too early, they no longer participate in the next stage of growth.

Many people do not become poor because they lose money.

They become poor because they cash out too early, get scared too early, stand outside too early, and then watch an entire era drive away without them.

Among these three people, the first person suffered the most. But he survived.

The second person may have had the strongest conviction. But he died the fastest.

The third person looked the smartest. But he may have spent most of the journey outside the game.

Long-term investing is often deeply unnatural:

You cannot be so fragile that every fall kills you.
But you also cannot be so clever that you are never in the game.

3. Long-term holding is not sacred

Compounding is not mindless buy and hold.

Long-term holding is not sacred by itself.

Holding a good asset can be compounding.

Holding garbage is just a funeral.

Holding something you cannot emotionally hold is torture.

A compoundable asset needs two things:

The asset itself must be able to grow over the long term.

And you must be able to hold it over the long term.

The first decides whether the asset deserves to compound.

The second decides whether you deserve to receive the compounding.

Some assets rise violently, but underneath they are just stories, emotions, or liquidity games. When they rise, they look like the wave of a new era. When they fall, you realize they were only foam on the tide.

After they collapse, they may never come back.

Holding that for ten years is not conviction.

It is a burial.

Some assets really are good assets, but their volatility is too large for you. Down 20%, you regret buying. Down 30%, you start doubting your life. Down 50%, you sell and leave.

Then no matter how good the asset is, it is not compoundable for you.

Because compounding is not only the asset’s ability.

It is the joint result of the asset and the person holding it.

The asset has to survive cycles.

The investor has to survive their own emotions.

You need both.

4. The secret to high long-term returns is not being more aggressive. It is not being crippled.

When people chase high annualized returns, their first instinct is often to use more leverage, buy more volatile individual stocks, or chase more explosive themes.

But the brutal truth is that losses are not linear.

If you gain 100% and then lose 50%, you are back where you started.

If you lose 50%, you need a 100% gain just to recover.

If you lose 80%, you need a 400% gain to recover.

So high long-term annualized returns are not about being the most aggressive every single year.

They are about capturing a meaningful part of the upside while avoiding being permanently damaged on the downside.

Many people make a lot of money in one year but have mediocre long-term results.

They make money fast, and they lose it fast.

That is not compounding.

That is a roller coaster.

The market is not afraid of your greed.

The market is afraid of you being greedy and fragile at the same time.

Controlling drawdowns does not mean guessing every market move.

A more realistic way is to design your account in advance so it is harder to kill:

Do not use leverage that can force liquidation.

Do not make one single stock large enough to ruin your life.

Rebalance after massive gains.

Always keep some cash and room for error.

Real long-termism does not mean never selling.

It means knowing what to endure, what to avoid, and when to admit you are wrong.

Price volatility can be endured.

Position size getting out of control should be adjusted.

A broken thesis should be admitted.

Risks that can kill you should be avoided before they arrive.

5. If I can 6x in one year, do I still need compounding?

Of course, if you can truly and consistently 6x your money every year, you do not need to wait twenty years.

The problem is that investing is not hard because making a lot in one year is impossible.

It is hard because after making a lot, you have to keep it — and keep it compounding.

If $100,000 becomes $600,000 in one year, that is incredible.

But if it falls 80% the next year, it becomes $120,000.

After two years, you only went from $100,000 to $120,000.

If it falls 90%, you are left with $60,000.

The first year’s myth can be taken back by the market in the second year.

So compounding is not against windfall gains.

It only reminds you:

A windfall becomes compounding only if it stays alive.

Making a lot of money is not the finish line.

Keeping that money alive is where compounding begins.

Assume the starting capital is $100,000:

This table is seductive.

But it assumes the hardest thing:

You did not get liquidated.

You did not go to zero.

You did not panic-sell.

You did not repeatedly start over.

It assumes you stayed inside the system for twenty years.

That is why compounding tends to favor the person who starts early, interrupts the process the least, and stays in the system the longest.

Time is not the background of compounding.

Time is the fuel.

The earlier you start, the fewer times you interrupt the process, the more terrifying the acceleration becomes later.

Compounding does not forbid you from moving fast.

It only forbids you from moving fast and then dying.

Final thought

Compounding is not a smooth upward curve.

It is more like a long elimination game.

It eliminates the people who get liquidated.

It eliminates the people who go to zero.

It eliminates the people who are always standing outside the market.

It eliminates the people whose psychology breaks before their thesis has time to work.

Long-term investing is not mindless buy and hold.

Real compounding is dynamic ownership of good assets.

If the thesis is intact, hold.

If the position has become too large, rebalance.

If the fundamentals break, admit it.

If it is only price volatility, do not panic.

If a risk can kill you, avoid it before it arrives.

Every few years, the market brings another storm.

Some people make a lot through luck and give it all back through leverage.

Some people take small profits again and again and end up permanently outside the game.

Some people may not have the highest return every single year, but they remain inside the system. No liquidation. No zero. No permanent psychological collapse.

After enough time, the difference becomes obvious.

In long-term investing, the final competition is not who has the highest return in a single year.

It is who still has an account years later.

Who still has cash flow.

Who still has positions.

Who still has the mental strength to continue.

Who is still alive.

Compounding is not wishing you sudden wealth.

Compounding is wishing you do not die.

As long as you are still here, compounding is not over.

These essays are personal reflections, not investment advice.