First principles
Go back to basics and ask just two questions: how does money grow, and how does the market work?
In One Sentence
Set aside how everyone else does it: break the problem down to its foundations, find the basic facts that can't be wrong, and reason your way to an answer from there.
Why It Matters
When I applied first principles to investing, the answer turned out to be surprisingly short: money grows through compounding, and the stock market rises over the long run, with cycles along the way. Many people assume that the deeper you think, the more complicated your method has to be; in fact, when you think all the way down to the basics, you learn which noise you can tune out.
One Number
Break the compounding formula apart and time carries the most weight: receiving NT$1 million a day for 31 days gives you NT$31 million, while NT$1 doubled every day for 31 days adds up to about NT$2.15 billion in total ("Stories of Compounding" · Chapter IV).
In the Book
Chapter IV introduces it with the example of Elon Musk breaking down the cost of batteries, then uses it to break compounding into four ingredients and to boil the stock market down to two basic facts.
Go Further
- Compounding Ask how money grows, and you get four ingredients: principal, growth rate, time and stability.
- Market cycles The stock market's other basic fact: it moves in cycles; what rises a lot falls, and what falls a lot rises.
- Simplicity Once you've broken things all the way down, the method that's left is usually very simple.
- Broad-market index ETFs What satisfies all four ingredients of compounding at once is a broad-market index ETF.