Over the last couple of weeks, I've been reading Morgan Housel's latest book, Same as Ever, and it's been absolutely excellent. No surprise there – his first book, The Psychology of Money, was a game-changer for many investors I know.
(And if you haven't read either of these, do yourself a favor and pick them up. Some of the best investing wisdom I've encountered.)
One chapter in particular called “Tiny and Magnificent” has been stuck in my head for the last few days. It's all about the power of compounding – and it got me thinking about one of Warren Buffett's two rules for investing:
Rule #1: Never lose money
Rule #2: Never forget rule #1
Notice it’s not “earn the highest returns possible” or “beat the market every year.” The priority isn't achieving spectacular returns – it's simply not losing your principal. (Something I've had to learn the hard way more than once in my investing journey.)
Why? A loss of principal interrupts compounding. And from an investment standpoint, that's one of the worst things you can possibly do.
The Most Underrated Investing Superpower: Consistency
There's a fascinating story in Housel's book about legendary investor Howard Marks that perfectly illustrates this point (emphasis mine):
Howard Marks once talked about an investor whose annual results were never ranked in the top quartile, but over a fourteen-year period he was in the top 4 percent of all investors. If he keeps those mediocre returns up for another ten years he may be in the top 1 percent of his peers—one of the greatest of his generation despite being unremarkable in any given year.
Think about that for a second.
A guy who never had a “wow” year still crushed almost everyone else over the long run. How? Relentless consistency and avoiding major losses.
This flies directly in the face of how most of us approach investing.
Paraphrasing from Same as Ever:
The intuitive investing question seems to be: ”What are the best returns I can earn?”
But the mathematically correct question is: “What are the best returns I can sustain for the longest period of time?”
The Magic of Boring
Here's a simple illustration that puts this in perspective:
If you earn a consistent 8% per year for 10 years, you'll double your money.
That's it. Just 8%.
Now in the real estate syndication world, nobody gets excited about 8% returns. I regularly talk with investors who yawn at anything below double digits. And I get it – when you see deals projecting 18% IRRs, why would you settle for single digits?
But here's what those flashy projections miss: sustainability and risk.
The investor chasing 20%+ returns has a significantly higher chance of losses that break the compounding effect. Meanwhile, the “boring” investor quietly doubles their money every decade, letting the miracle of compounding do the heavy lifting.
Human psychology tends to overvalue short-term wins and undervalue consistency. We get a dopamine hit from big numbers, not from the plodding discipline that actually builds wealth.
Wealth Preservation > Wealth Creation
I've seen too many investors focus exclusively on returns while neglecting the more important question: “What's the risk of losing my principal?”
Remember that if you lose 50% on an investment, you need a 100% return just to get back to where you started. You've not only lost money – you've lost time, which is the essential ingredient in compounding.
Sure, it's fine to have a speculative portion of your portfolio if that's your thing. But speculative investments shouldn't be the core of your wealth-building strategy.
The math is unforgiving: breaking the compounding chain even once drastically reduces your long-term results.
The Bottom Line
The next time you're evaluating an investment opportunity with eye-popping projected returns, ask yourself: “Is the additional risk worth it?”
Would you rather:
Chase spectacular returns with higher risk of principal loss
Earn “boring” but sustainable returns that compound reliably for decades
Most people choose the first option, which is exactly why most people don't build significant wealth through investing.
So I'll leave you with this: value consistency over flash. Prioritize preservation over spectacular growth. And remember that the most powerful force in investing isn't finding the next big thing – it's simply not interrupting compounding.
Remember, Buffett didn't become one of the world's wealthiest people by swinging for the fences with every investment. He did it by making solid decisions and letting time do the heavy lifting.