Compounding and Volatility

The Asymmetric Portfolio is down over 25% from its peak on February 19 and yet it’s still beating the market in 2025. Below I’m going to explain why.

A few of the biggest positions are down over 50% as volatility and fear have hit the market.

This kind of volatility may seem bad, but it’s not. It’s a feature of the kind of investing I do and it’s why over a longer period the same portfolio has more than doubled the market’s performance.

Note: Neither of these charts includes the “Special Situation Short of Tesla,” which is up 141% since it was put on January 22, 2025.

If the market continues to fall I would expect to underperform the market in the short term. But long-term, stocks go up more than they go down and the combination of volatility and compounding will drive outperformance by the Asymmetric Portfolio.

Compounding is a simplest concept but it may be the hardest finance concept to truly understand.

Why is it better to buy an expensive stock compounding revenue growth at a faster rate than a cheaper stock? Compounding.

Why do “safe” stocks that trade for a premium to volatile stocks underperform the market? The lack of compounding.

How did Warren Buffett get so rich? Compounding!

I’m going to try to explain this interpay between volatility and compounding below.

Before we get there, the market continued its decline this week. You can see below the Nasdaq 100 is down 13.1% since hitting its high on February 19 and the S&P 500 is down 9.3%. If there’s a recession, as more of the market is fearing, this decline will continue. I see any further decline as an opportunity to buy great companies at better prices. And I’ll double my monthly investment in the Asymmetric Portfolio if the market falls over 20%!

In Case You Missed It

Here’s some of the content I put out this week.

• Tariffs, M&A, and Investing: I looked at what we know about tariffs, why Alphabet’s Wiz acquisition was brilliant, and how I’m investing in this market.

• Autonomous Driving Business Models: Tesla and Mobileye have different business models in autonomous driving and one looks better than the other right now.

• Robinhood Does It Again: To say Robinhood is hitting on all cylinders understates just how well the company is doing.

Volatility and Compounding

Compounding is a cheat code for investors. If you buy companies that can compound revenue and earnings growth over decades it will drive great performance and compounding stock gains.

The price we pay for high levels of compounding is volatility. That volatility is why the Asymmetric Portfolio is down over 25% in two months. But it’s a key to its outperformance long-term.

Let’s go through two examples of how higher volatility portfolio will beat a low volatility portfolio over time. This example is built on two assumptions:

1. The high volatility portfolio generates 2x the return of the low volatility portfolio each year

2. Stocks go up more than they go down

Historically, both are true, so let’s see how this plays out long-term.

You can see the high volatility portfolio outperforms by a wide margin.

But a 40% return over a 10-year period is below market average, so let’s kick up the returns to closer to market average.

As you can see, the high volatility’s outperformance is magnified.

If we kicked returns up to even the market’s average performance of an average of about 10% per year, the gains of the higher volatility portfolio would be even more magnified.

This combination of magnified returns from more volatile stocks and compounding over time is central to the success of Asymmetric Investing.

Buying Low

What the tables above don’t include is any additions to the portfolio at lower prices. Especially with more volatile stocks, taking advantage of the big downturns is where asymmetric returns can be found.

Yes, buying a great company early at a high price, like Amazon at its in 1999 peak, would have been a phenomenal investment.

But buying more when shares dropped in 2001 would have resulted in even better returns.

The combination of buying high-growth stocks compounding their revenue, holding for a long period, and dollar cost averaging over time is a path to outperformance.

Speaking of buying at lower prices, my next buys will be out on April 1, 2025, for premium subscribers. See you then!

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please do your research before acquiring stocks.