My friend Ravi came home for lunch last weekend. He looked dejected.
“It’s a bull market, Ravi!” I said trying to cheer him up, but he was in no mood to give away his dejection.
“I’m nearing forty, Vishal, and that makes me depressed.”
“Why Ravi? You should be happy that you’ve already left your dumb forty years behind!” I said jokingly.
“Be serious, Vishal! I mean, forty years have passed and it seems I have not achieved much in life. My salary is good but not great, I am travelling long hours every day for my job, my investment portfolio size is still a far cry from what I want to retire with, my stocks are doing well but not as well like what my other friends’ stocks are doing, and my dream of writing a bestseller novel is still a dream.”
“Wow! And you are nearing forty!” I said with a smile.
“You don’t have to remind me that!” Ravi replied with a smirk.
“Ravi, how much would you rate your life so far on a scale of one to ten?”
“Maybe, a five!” he said.
“Which is normal,” I said.
“Normal? Five on a scale of one to ten, after forty years, and with maybe just twenty or thirty more remaining? You call this normal?”
I pulled out a piece of paper and drew this chart.
“Look at this, Ravi.”
“It looks like a hockey stick,” he said.
“Perfect, you got that right. It’s called the J-Curve, and it’s how a lot of things move in our lives, work, and investing.”
“Yes, my dear friend. I’m sure you have heard of Elon Musk. Have you?”
“Oh, of course!” he replied. “That superstar CEO who has shot into limelight with his work on electric cars and space rockets. Everyone knows about him!”
“Right Ravi,” I said. “Everyone now knows who Elon Musk is and what work he does. In fact, it’s easy to consider Mr. Musk and his rise in space, electric cars, and solar power as ridiculously rapid. But that’s not the case at all. Not many would know that SpaceX was founded in June 2002, and Tesla in July 2003…that’s around 14-15 years back.”
“Oh! I thought these were very new companies…like just five-six years old.”
“No dear!” I said. “While we are seeing a huge acceleration in what these companies can do, these have not been overnight successes. It’s only that they have become better (and rapidly now) with time. In other words, what we are really seeing with Mr. Musk’s businesses are the returns on the far-right side of the J-curve. And so is the case with Jeff Bezos’ Amazon. We now know Amazon so well, but it has been in making since 1994…”
“…when I was just 16 years old? Wow!” Ravi interrupted.
“Yes, when you first told me about your dream of writing a bestseller novel!”
“You are a sadist, Vishal!”
“Oh, don’t feel bad, my friend. I wish to cheer you up…and tell you that what you are going through is what is called a mid-life crisis…and which is a very normal way of thinking at this stage of life.”
“So can I say that I am at that deepest point of the J-curve now?”
“Yes, it seems so. In fact, scientists have found that we start on the left of the J-curve around age 18 when we are generally feeling pretty good about life. But as we leave the freedom and creativity of childhood and venture out into the real world, our level of happiness drops.”
“I know because I am living this J-curve!” Ravi exclaimed.
“Almost all of us live such a life, Ravi. So please don’t get depressed. In fact, people start out in life certain that they’re going to end up like Sachin Tendulkar, Priyanka Chopra, or win the Nobel Prize for Peace. And then, after a few years, they discover it’s quite tough out there – not just in their careers, but in life. Unsurprisingly, their happiness drops.”
“I completely agree with that, and that makes me even more depressed!”
“Don’t be, Ravi, because the good news is that scientists have also found out that the unhappiness phase does not last long. In fact, like the J-curve falls steadily and then rises again, most people’s lives generally trough at around the early forties. Most of us then grow steadily happier as we get older, with those in their sixties expressing the highest satisfaction levels of all – as long, that is, as they stay healthy.”
“Well, Vishal, it makes me happy to know that I am at the deep end of the J-curve and that my happiness is only going to rise from here on.”
“That’s one way to look at it,” I said. “Another way is to realize that you already are blessed with so many good things in life – like a well-paying job, good food to eat, a healthy and loving family, and your own house – that you must not be feeling dejected in the first place.”
“I think you are right, Vishal. Having a friend like you also makes me happy.”
“The feeling is mutual, Ravi.”
“By the way, Vishal, you had said sometime back that the J-curve also applies to investing. Here, are you talking about the back-ended nature of compounding?”
“You got it, Ravi. The J-curve signifies the accelerated payoff from owning good businesses you bought in the past, when you own them for the long term. Especially when you are sensible with your money and practice true value investing, you may sometimes underperform others following momentum strategies etc. in a rising market. But, over time, it has been proven that buying good businesses with sufficient margin of safety, and owing them till they remain good, is a stress-free way of creating great wealth. In short, the J-curve also works when it comes to investing well and in high-quality businesses.”
“Point taken, Vishal. But what about companies that are passing through bad times and maybe running negative cash flows as of now, but may be investing for a good future? Would a J-curve thinking work there too?”
“That’s a wonderful question, Ravi. And I have myself thought about it several times. I think in most cases, if the business has displayed strength in the past and is now in an investment mode and thus running negative cash flows, or is passing through a bad phase maybe because of an economy-wide slowdown, it pays to look at them through the lens of the J-curve. But you must ensure that the business has the capacity to suffer these bad times, has a long runway of growth, and then you buy it with sufficient margin of safety in case the curve doesn’t become a J, and never picks up after falling off the initial cliff.”
“Margin of safety seems to be your favourite term in investing, right Vishal?”
“Always, Ravi. And not just in investing. I live this principle in my daily life too. Like Charlie Munger suggests, I try to find out places where I may die and then I try not to go there. That’s margin of safety in practice, isn’t it?”
“Of course it is, Vishal. And when things are difficult and we wonder if we have done the right thing, it might be useful to visualize being at the bottom of the J-curve. Right?”
“Yes, Ravi! And if we persevere, things get better, and often, they get better than they were before.”