This article is for education only. It is not a recommendation to buy or sell any stock, fund or ETF mentioned, including BCA, LSIP, EIDO or MSCI itself. Past performance does not tell you what will happen next.

MSCI’s proposal is still a consultation. Its final decision is due by 30 June 2027 and may differ from what is described here. Figures come from public filings and news reports as of October 2026. The two enforcement charts are illustrations, not measured data.

In Indonesia, we’ve all heard about the shocker that was released by MSCI to our capital market. They issued an announcement, opening a consultation to reclassify Indonesia from emerging market into the standalone market. This announcement took everyone by surprise because for the most of 2026, market participants are somewhat downplaying the possibility of Indonesia to be downgraded to frontier market. Now, there is a real possibility that Indonesia is going to move below even frontier, into standalone market.

Before we get into the meat of today’s article, I’d like to express my humble opinion that what MSCI is doing to our capital market is very good to accelerate the reformation process of our capital market. Our regulators have had a bad reputation in policing financial market just from the slew of financial scandals that materialise in our country recently. Not only in the stock market, but other money related markets too. High profile cases are:

• Various shadow banks blowups like Indosurya

• Pension funds that are grossly mismanaged like Asabri

• P2p agri startups that blew up like Tanifund

• And of course the age old coordinated trading or colloquially known as “goreng-menggoreng saham”

I cannot imagine myself being in the position of a regulator, having to deal with the mess that they are up against. But I am sure at the very least, with the threat of a global player like MSCI, regulators would have more leverage to clean up this ecosystem, fast.

Because we all know that law enforcement is not an easy feat. We also know that enforcement in emerging market, like Jakarta, is definitely not as a good as one that we see in London or New York.

So perhaps this event might reduce the gap to the level what illustration is showing below

So yeah, I sit on the more cautiously optimistic camp that regulators would be able to get their act together, considering that banking reforms was a huge success in the turn of the 21st century. We now have very strong banks with largest net interest margins in the region. And these banks are very very well regulated too, with strict standards in place surrounding capital adequacy ratio, net open position, etc.

But today’s article is not going to be about our regulators

Social media, the news, and plenty other highly respected individuals have provided their opinions about areas of improvement for our regulators. This article is going to focus on MSCI itself. What is their business like and the assumptions that they make when raking in profits. Fortunately they are a public company so their filings and annual reports are free for us to see.

By having a greater appreciation of what their business model and underlying assumption is, we will be able to make better sense of their decisions. We would also have a better view about the ongoing active vs passive investing debate that is happening in the Western world. It is essentially a tug of war of investing paradigm. From asset managers (who run index funds vs those who run active funds) all the way to startups like Wealthfront (who’s more passive) and Titan (who’s more active in advising wealth).

This MSCI Indonesia downgrade episode certainly adds more data point to the whole debate. Especially about the implementation of passive investing strategies in the market.

But first how does MSCI make money?

You can think of it as MSCI as a Premier League in investing. Yes although it is not completely analogous, it helps think football for a minute and think of them as the Premier League.

Assume MSCI as an entity that defines rulebook of who gets relegated and who gets promoted.

The countries are the clubs inside who’s trying to win or get promoted up in the league. They care about winning and not getting relegated.

The passive funds are entities like SkySports. They don’t play. They just earn from covering the football matches. They don’t really care who wins. All they care about is that more and more people watching the game of football over the years.

And just like SkySports pays the Premier League for the rights to broadcast, index funds pay MSCI a licence fee to use its list.

So what problem does MSCI solve? Why a Premier League in investing is needed? Because if it does not solve any problem and it is not needed, then you wouldn’t have MSCI in the first place.

The rise of passive investing.

Passive investing back in the day was a brilliant financial innovation in the wake of mutual funds with massive fees and overzealous fund managers, at the expense of investor returns. The idea was to invest the market so that investors are guaranteed to get average market returns. Assuming market returns are satisfactory, it follows that investors are “guaranteed” to get a satisfactory returns.

This innovation was pioneered by John Bogle, who launched the first index fund for everyday investors at Vanguard in 1976. Funny enough, Bogle himself was never a fan of investing abroad. He famously said that you don’t need to own international stocks.

But the rest of the industry disagreed. And to take passive investing outside the US, you need a ruler for markets you know very little about. That ruler already existed. Back in 1969, Capital International (the “CI” in MSCI) started publishing global stock market indexes as a yardstick for investors comparing markets around the world. In the mid-1990s, Morgan Stanley launched some of the first ETFs that simply tracked those country indexes. They later became iShares, the family EIDO belongs to today.

So MSCI became the neutral standard setter that determines two broad things:

1. The country risk

2. The selected securities in a given country

The riskier the country, the less allocation it gets. And the risk is also defined very clearly from capital controls, information flow, liquidity, and so on. Therefore, we have the classifications that are in place.

Now the second one is a little bit tricky. Because the goal is to invest in the market in order to get market returns. But as I will explain, it is not that straightforward.

Let’s start with the ideal scenario.

A quick note before the maths: what follows is a simplified version of how MSCI builds its indexes. The real rulebook runs to hundreds of pages, with extra screens, buffers and caps. But the core idea is the same, and the core idea is what matters for this story. If you want to geek out and read the entire thing, I have included it at the end of this article.

In a perfect world, if you want to invest in the market, you should be able to buy all stocks in the stock market, weighted by their respective market caps. To put this concretely, if BCA is 20% of the stock market, you would want to allocate 20% to BCA.

And if LSIP is 0.5% of the market, you would want to allocate 0.5% of LSIP in your portfolio. If you can execute this investment to all 900+ companies in JCI, then your mission is accomplished as a passive investor. This is elegant because in this ideal scenario, you do not have to do any rebalancing irrespective of market movement. Because lets say that BCA goes up and occupy 22% of the market weight, your portfolio will also have 22% of BCA and the rest of the weights are automatically adjusted without you having to do anything.

To put it in mathematical terms, you can compute the weight of the stock you want to put in your porfolio by following the formula below:

wᵢ = Pᵢ × Nᵢ / Σⱼ (Pⱼ × Nⱼ)

where

w = the stock’s weight in the index

P = share price

N = number of shares

Σ = add up across every company in the index

Note: share price multiplied by number of shares gets you the market cap. So the formula above reads market cap of an individual company divided by the market cap of all listed companies.

So if MSCI lets their clients invest in the “market” why are there so few companies in the MSCI list?

I’ve just shown that it is very easy in theory for you to determine the weight of each individual stock in your passive investment portfolio. But why MSCI have to come up with the algorithm to include stocks?

So the problem is not the price movement but the problem is number of stocks. Out of 900 stocks we have in JCI, a big fraction of them (couple hundred stocks) barely trade. So imagine if you are an index fund, you will have to facilitate money movement into and out from your funds. Every time an investor puts in money or take money out from your fund, the fund has to buy or sell a little of every stock to keep matching the market.

For the big stocks with a lot of liquidity (high transaction value), that is easy.

But for the small stocks with much less liquidity, that gets expensive and impractical.

Here’s a quick example with made up numbers and lets use BCA again for familiarity:

• The fund gets US$100 million of new money and has to spread it across the market.

• BCA is about 20% of the market, so the fund buys US$20 million of BCA. BCA trades far more than that every day.

• A small company is 0.01% of the market, so the fund buys US$10,000 of it. But that stock might only trade US$5,000 a day. The fund needs two days, and its own buying pushes the price up.

Maybe you are ok with dealing with one small company with 0.01% of the market. But there are hundreds of small companies that you have to deal with every time money comes in or goes out. So you see how nightmarish it is to track the market this way?

So the theoretical solution here is also very elegant. You have to create a proxy of the market by selecting a basket of stocks that make up most of the weight of the market. And the good news is that the market value is lopsided. Only a handful of companies often make up most of the market. So the algorithm becomes as simple:

1. Sort companies based on market capitalisation in descending order based of its free float value

2. Go down the list and stop when the companies in the basket is 85% of the market value

So it is not exactly top 10 or top 20 companies. But whatever number the companies really is that make up 85% of the market value.

Why 85% is good enough?

Because market return is the value weighted average of every stock returns in the market. So if you cover 85% of the market in the basket you have constructed. The only way you’d “miss” the market returns is if the remaining 15% of the companies behave extremely differently.

Huh?

To give you concrete numbers, lets say the big names (the one you hold on your basket) gives you 10% returns.

And lets say again that the small names (remaining) performs 40% better with 14% returns. You might think that aw darn it I’ve missed the rally. Well, not really. Because the market returns is:

0.85 * 10% + 0.15 * 14%

which computes to 10.6%.

This means that you only trail 0.6% by owning 85% of the market. Not bad, and over a longer term period, the remaining 15% of the market might lag behind in terms of performance too and you will be able to neatly track the market.

Free float enters the party

This is the cleverest bit, in my opinion, to ensure that the index fund is scalable and implementable for a huge audience of investors. Free float means the actual shares that is for sale, rather than the total shares outstanding of a company. When you list a company, you might only want to part ways with 20% of your company ownership to raise funds from the public. You still keep 80% your company without any intention of selling to any party.

So if you are a passive investor, you do not want to end up buying a share of a company that is not for sale. So the true investable value of a given market is now

Σⱼ (Pⱼ × Nⱼ × Fⱼ)

and determining the weight of a stock in your basket is now

wᵢ = Pᵢ × Nᵢ × Fᵢ / Σⱼ (Pⱼ × Nⱼ × Fⱼ)

where

w = the stock’s weight in the index

P = share price

N = number of shares

F = free float, the share of the company that is actually for sale (between 0 and 1)

Σ = add up across every company in the index

Great, all sounds good

This is where things get exciting. Because bunch of theoretical model and math formulas allow you to implement a real investment product that does not need human intervention. A valid criticism towards active management is fund managers are human which might influence investment decisions. So passive investing takes the humans out of the equation as much as possible.

And MSCI is instrumental in making that happen. The underlying maths that I have just shown you earlier becomes their basis of selecting which securities they want to include. Then investing in the selected stocks is akin to investing in “the market” of a certain country.

Now suppose you are an asset manager, wanting to issue passive index funds to offer to a client. The client wants to invest in the Indonesian market. But you are not going to pick their stocks for them because you might have little clue about Indonesian companies. So what you could do is to use the guideline that is provided by MSCI then buy and sell the shares based on the securities that get included in the basket.

Mind you, MSCI is not doing this for free. If you look at their company earnings, the fund issuer pays MSCI a licence fee, charged in basis points of the fund’s assets. So the more AUM a fund manages, the more licence fee MSCI gets.

This is what the figures look like:

If you look at the period between 2022 and 2025, the ETF AUM nearly doubled.

But there’s a problem

In the nooks and cranny of MSCI small portion of their emerging market segment, Indonesia sits there occupying less than 1% of allocation. The most famous ETF that is issued using MSCI’s guideline is EIDO. Well, their performance does not really capture the performance of the Indonesian market at all. As for the past 10 years, they are down 5% every year on average.

Maybe you might be thinking, boohoo 5% every year is not that bad.

Well, if you are down on average 5% every year for 10 years, assuming you start your investment at $100, you are left with $60.

If you invest that same $100, 10 years ago in the Indonesian market, you will roughly get a flat performance as shown below:

Note: EIDO’s return is in US dollars, includes dividends, and is as of 30 June 2026. The JCI figures are in rupiah and are price only. Dividends would lift the JCI’s number, while the rupiah’s fall against the dollar would lower it for a foreign investor. Treat the gap as a rough picture, not an exact one.

So EIDO has been lagging the JCI every year for the past 10 years. And that is not the problem.

The problem is that it appears now to be a problem

The recent threat to downgrade Indonesia from emerging market to standalone market provides us with a clue.

“persistent opacity in shareholding structures and suspected coordinated trading behavior”

“significant concerns remain around market dysfunction, including continued suspected coordinated trading behavior”

“lack of evidence of meaningful enforcement”

“a reclassification to Frontier Markets would not properly recognize the depth of the market problems”

We definitely understand that high coordinated trading and price manipulation is a problem in every capital market in the world. But we also know that coordinated trading contains a subjective component to it. We will never be so sure about how much price is inflated due to greed vs actual manipulation. Especially in this day and age where spread of information is easy.

Perhaps we can find evidence yes, but getting the complete picture of how bad the manipulation is must contain some element of subjectivity.

Whereas capital controls (which a criteria for standalone market) is much more measurable and objective. Which also happens to be a reason why countries get sent to standalone market.

What does possibility of Indonesia’s downgrade mean

And to us, it is quite clear that Indonesia has regulatory problems.

But I believe that is only half of the picture. Indonesia’s downgrade seems to be suggesting that MSCI is admitting their own inherent limitation in their passive investing strategies. It is sending clear signal to investors that passive investing eventually will require a more subjective, human, and active intervention that of course, could be driven by emotions.

Because how do we differentiate between greed and price manipulation?

How do we draw the line? Is 10 years of price coordination the line I draw to tolerate inflated asset prices? Or 20? Or 5?

Would I be acting the same and upgrade Indonesia to developed market status if price coordination is benefiting my ETFs?

If I were to be MSCI, of course I would rather pinpoint the failure of my investment strategy by pointing out to the loose law enforcement.

But if I were to be intellectually honest, I would also believe that that is the limitation of my passive investment strategy. That eventually, only looking at free float market cap is not an investment practice that will always be a good idea.

And Indonesia is not the only place where this is happening. Four days after MSCI’s announcement, FTSE Russell, another major index provider, opened a consultation on its US style indexes. Its rule says the Growth and Value indexes must split the market 50/50. But a few tech giants have grown so big that the rule started pushing companies like Amazon, Apple and Microsoft into the Value index. So FTSE Russell is now proposing to change the rule.

Different market, same lesson. The rulebook runs on autopilot until reality breaks one of its assumptions. Then humans have to step in.

It is like the Premier League. Imagine the League catches a club inflating their club revenue unfairly to buy expensive players. It will punish the club, maybe even relegate it. What it will not say is that its own rulebook made such financial engineering easy. Because the moment fans believe the whole league can be rigged, fewer people watch. And when fewer people watch, Skysports pays less to the League for the next broadcast deal. Punishing one club protects the product. Admitting a flaw in the rulebook threatens the very same product.

Note: I know that I am a Man Utd fan. But the fact that there’s an ongoing scandal in the Premier League in 2026 with Man City is definitely not the reason why I chose this analogy. It just happens to illustrate the point quite clearly.

Closing Remarks

What do you think? I believe that there should be a fair share of both passive and active management in an equilibrium. If everyone is too passive, it benefits the active managers who really look into it. If everyone is too active, it benefits the passive investment managers.

Right now, the tip of the balance seems to fall into the passive side. Will it turn the other way around in our life time? I don’t know. But interesting to see nonetheless.

Cheers.

Links to materials

MSCI’s decision

• MSCI press release, 15 Oct 2026 (the quotes in your draft)

• Euronews: IHSG falls 11% on 16 Oct

• CNBC Indonesia: official responses (OJK, DPR, Danantara)

• IDN Financials: OJK fines DSSA, BREN, CUAN Rp 2.1 trillion

MSCI’s method (the 85%, free float, liquidity rules)

• MSCI GIMI Methodology book (2016 edition; link the current one from msci.com if you can find it)

MSCI’s fees (your table)

• FY2023 results

• FY2024 results

• FY2025 results

• Q2 / H1 2026 results

EIDO and the JCI

• EIDO factsheet, 30 June 2026

• CNN Indonesia: JCI at 5,016 on 30 June 2016

• Pasardana: JCI at 5,643 on 30 June 2026

History (Bogle, MSCI, iShares)

• InvestmentNews: Bogle says investors don’t need international stocks (2017)

• Securities.io: MSCI history, 1969 indexes

• Wikipedia: iShares (WEBS tracked MSCI indexes)

1. Market does not care who you are. It will wipe you out if you are not prepared, even if you are the son of a conglo with prime A1 information.

2. If you can’t explain what you are buying, you don’t buy a business, you buy a ticker.

3. It went up, you “just” do not know when to sell. But you know its not just a “just”. So you are -60% now.

4. Blaming the macro, the government, the geopolitics feels good because it means you never have to change anything.

5. Everyone is a genius in the stock market, on hindsight.

6. “I will sell when I break even” is not a plan. It is a prayer.

7. You didn’t lose the money when you sold at a loss. You lost it when you had no proper plan when you bought. Selling is an admission of your past mistake.

8. No body is responsible for the mistakes you made in the market. Not your parents. Not your friends. Not your investment guru. Only you are responsible.

9. Therefore, nobody is going to save your portfolio and turn it around in an instant.

10. 15% per year looks like peak stupidity, when your friends are bragging 400% returns.

11. Your ego is your worst enemy and you know it. But you still choose to (fill in the blanks yourself)

12. Everyone says they have “learned the lesson”. But most still keep their position.

So therapy does not make you immune to the mistakes

It just shortens the denial phase to accept reality. It expedites you growing up and graduating from get rich quick schemes and irresponsible investing behavior.

Which is why we are building Recompound Balik Modal. You transfer the pasrah, stress, anxiety to us. And you get all the things we stand for:

• Money stays with you (no sharing sekuritas password)

• Restructuring plans shared with you transparently

• Investment recommendation from actual licensed investment advisor

• You pay once all the way until you break even

Learn More

Disclaimer

Not investment advice. Recompound is the platform; the advisor is Budi Ryan, OJK-licensed investment advisor.

Investing is a competition. No matter how much you’d like to frame it. The pie (businesses) you invest can get larger. You can earn dividends. And you can grow your capital through your investments. But in some sense, it is still a competition.

Every time you buy a share in the market at price X. Someone is selling that share in the market at price X.

When you sell a share in the market at price Y. Someone is buying that share at that price because they are betting that the price will be higher than Y at some point in the future.

One of you in both scenarios are likely going to be wrong.

Which is why if we accept that investing is a competition, we need to have a competitive edge. Otherwise, we won’t win and won’t be able to grow our investments over the long run.

But there’s a problem

For sharp readers, if we are investing together with our customers, does that mean that we are giving our competitive edge away?

And if so, would that mean that the investment strategy is less potent?

So let’s take a look at various kinds of competitive edges that an investor can possess in order to earn returns in the market. And we’d be honest which one we have. and which one we don’t.

Some competitive edge is zero sum. Meaning that if we give them away to other people, we will have less of it for ourselves. Others, not really.

Edge #1: Information

Here’s my LinkedIn profile. And here’s Budi’s. If you have stalked us on LinkedIn and do a bit of a background check, notice that we have never worked in a security brokerage firm before. We have never worked in an asset management firm before too.

Informational edge, based on what I see is usually built on relations with company owners, market makers and powerful parties that can influence price in a significant way. Building those kinds of relations requires time and location to be in that environment. We don’t have that. So we will not pretend like we do 😅

Granted, it is not that we never hear stock tips. We do. Most of us receive them on WhatsApp groups, coffee shops, random acquaintances. And we have seen people made bank with insider information. But we have also seen people gone bankrupt with insider information. So we definitely do not want to rely on an edge we don’t possess and risking bankruptcy. That’s not us being an angel or a saint. It is us not wanting to be fools risking clients’ money and trust, plain and simple.

Luckily, being successful in the stock market does not require one to have an insider information edge. There are other competitive edges that an investor could focus on for long term success.

Besides, in economics, informational edge is a rivalrous good. Which means, if I give you this information stock A is going to be jacked up tomorrow, this diminishes my ability to capitalise this information. Because stock A, in effect, has limited supply at current prices. I will get less of stock A at price X, if you know that if you can get super good returns when you buy stock A at price X.

Edge #2: Being smart

The second edge is analysis. For us value investors, it means how good are you at collecting the puzzle pieces on a company and assembling them into a simple opinion about its intrinsic value? When you’ve managed to do so, could you get to buy at a price lower than its intrinsic value?

Every investment is essentially a bet on a range of probable future outcomes. If the expected value is above the price you’re paying, and you make that bet a handful of times, then statistically speaking, you’ll come out ahead.

Yes, even though there will be wrong individual bets.

This edge is necessary to succeed in investing. If our analysis were bad, nothing else in this post would save us. But we have just made a confession about not having a finance degree or a work experience at an asset management firm. Surely our analysis is worse than folks who have a finance background. Right?

Well the answer is we don’t care and the market does not care either. Here is how I actually think about it. In value investing you don’t need to be the smartest person in the room. You need to be smart enough. Smart enough to see that the price you’re paying is less than the value you’re getting. That’s it.

Also, even if you are right that the price is lower than the value, the market does not have to agree. In fact, the market might not agree with your analysis for a long, long time. Because what you have is an opinion. And market reflects the collective opinions of all market participants that gets displayed as price for that day. Collective opinions do not have to be right all the time.

So even if we have intelligence, we are arguing that it is not sufficient.

It is like applying for a job at Google as a software engineer. You don’t need a CS degree. You just need to know enough about coding, data structures algorithms, databases, AI etc. And you can learn all that by yourself by contributing to open source repositories on Github, even if you major in history.

That CS knowledge is necessary to land a job at Google. But not sufficient.

Edge #3: Time

How long you can hold something without needing it to be right yet.

The more time you have, the more time you allow luck to land on your position. So once you have made bets that have odds on your favour, each day is really an opportunity for the market to discover that your bet is right. That day could be 1 month. Or it could be 10 years, after 9.9 years of 0 price movement.

The value of the company (earnings of a company) is like a magnet to the price. The price in the long run, will follow the company’s fundamentals.

So the person with more time to sit in their investments, has a stronger competitive edge than those who don’t. Because again, the person has a larger surface for the luck to land. For the market to “realize” that it has been wrong in pricing the asset.

But there is something powerful about this competitive edge too. How patient you are in seeing progress in your investments, does not make another person less patient. So you could help people be more patient on their investments, without ruining your own returns (or making you less patient).

As a matter of fact, the more you help people stay patient, the more vigilant you become in your own investments as well, which overall becomes a virtuous circle for you.

And by the way, guess who is compounding’s essential friend? You’ve guessed it. Time.

Only time will allow you to fully feel the power of compounding. And the start will always feel arduously long.

Edge #4: Behavior

Now this is another competitive edge that often gets neglected. What do we do when we get worried about our investments?

What do we do when the market rallies, and we feel that we have not jumped into enough of the winners?

What do we do when the market stays flat for months on end?

Despite the analysis, despite the patience that we have, we might still end up making investment decisions without a rational framework.

And it is not that we have to be unemotional when we make buy or sell decisions. We are emotional. We feel greed or fear too. But those fear and greed are contained in a rational framework that we can logically defend. Without this framework, investment decisions tend to be inconsistent and we tend to follow our natural tendencies.

The unfortunate thing is that our natural tendencies often do a disservice to our long term investing efforts:

• confirmation bias

• fear

• greed

• ego

• exponential growth bias

• mental accounting

• and so many other well documented cognitive biases

It is akin to losing weight without a proper framework. If we attempt to lose weight by winging it, not knowing the calories we need to take in to fuel. Not knowing how much calories we burn. Not knowing what food patterns we can stick to, we likely will end up be on a yoyo diet with suboptimal results.

Yes, use those natural tendencies to your investment portfolio, and you’ll get a yoyo portfolio (I might trademark this some day). Some days green other days red. At the end, you wouldn’t know whether it is giving you the growth that you expect or not.

The best thing about behavioral edge is that it is also a non-rivalrous good. Meaning that me having a good behavior with my investments does not diminish your ability to have good behavior as well. And the better our behavior and mindset towards our behavior, the higher the likelihood that we will get better long term results.

Closing Remarks

I always analogize building Recompound like building a gym. We are fairly accessible but we are not for everyone. I think it is ideal if more people can go to gym and have a healthy and fit body. But I am also realistic that not everyone is at the stage where they feel compelled to prioritize their health and fitness. I think that only a handful will feel the need to be fit and healthy.

It is the same as Recompound. I think it is ideal if more people can have good mindset and good structure towards their long term investments in the Indonesian equity space. But I am also realistic that not everyone is at that stage to want to prioritize investing for the long term. I think that only a handful will feel the need to invest well for the long term.

This is also the honest answer to what Recompound is for. The value we give is not only making the stock picks available, although that is necessary and we are proud of what we can produce. The value we give you is that we develop your behavioural edge. There is a written thesis on your dashboard so that on the bad day there is something to go back to that is not the price. There is a monthly report that explains what happened and why. There is a direct line to Budi, because the message you send at 10pm during a crash matters more than analysis we write. And it is why a performance-based fee makes sense to us. It is a share of what the behaviour produced.

If you held when holding was hard, we earned something when your portfolio eventually performs. If you did not, we earned nothing.

Which is why giving this investing competitive edge away does not really take anything away from us. If anything, we get more out of it.

Win win.

Disclaimer: This article is my personal opinion, written for educational purposes only. Nothing in it is financial advice, and nothing here is a recommendation to buy, sell, or hold any security. The two portfolios below are a simulation I built to illustrate a point: the return sequences are made up, shuffled, and shown before fees and taxes. They are not a forecast, not a promise, and not Recompound's track record. Investing carries risk, including loss of capital. Please do your own research and speak with a licensed professional before making decisions.

Here is a question I ask on almost every first call with a prospective client. Two portfolios, same starting capital, same fifteen years.

Portfolio A returns about 15% a year on average. Slow, but it never falls far. Its best year is +35%, its worst is −7%. No year worth bragging about, no year worth crying about.

Portfolio B returns +100% in eight of the fifteen years and −40% in the other seven, in random order, like a real market. The good years are spectacular. The bad years are brutal.

Which one do you want?

Most people pick B. And honestly, I understand why.

The treasure-hunting mentality

Who doesn't want to find the next multibagger? The buried treasure that goes up 1,000%. Put in US$6,000, take out US$60,000. In Indonesia we even have a name for the hunt: cacing-cacing naga-naga, "worms and dragons". You buy a tiny stock (a worm) hoping it turns into a dragon.

And let's be honest about the other reason, because nobody says it out loud: ego. "I got 10x on this stock" is a much better story at the bar, or in the group chat, than "my portfolio went up 15%". Nobody has ever gone viral with a 15% year.

What people rarely account for is how rare the treasure actually is. Genuine 10-baggers are needles in a haystack, and the haystack is on fire half the time. I used to build credit-scoring models for a living, and the first thing you learn about rare events is that the stories you hear are the survivors. Nobody posts the worms that stayed worms.

Portfolio A is the opposite mentality. Not treasure hunting. Planting a tree. Small at first, grows a little every year, and you never dig it up to check the roots.

The early years feel terrible

I won't pretend Portfolio A is fun at the start.

Year one: 1.17x. Year two: 1.45x. Year three: 1.65x. Three years in and your money hasn't even doubled. Meanwhile Portfolio B is at 2x after year one and 4x after year two. At this point B looks like the obvious winner, and the people holding A look like they are missing out.

Hold that thought.

Now run it for fifteen years

Portfolio A finishes at 8.14x its starting capital. Portfolio B finishes at 7.17x.

The tortoise wins. Not by a landslide, but it wins, despite B having a "much higher" average return. On US$60,000 (roughly Rp 1 billion, the number I use with Indonesian clients), that is about US$488,000 versus US$430,000.

And here is the part that surprises people the most: it does not matter in which order B's good and bad years arrive. Multiplication is commutative. Shuffle those eight +100% years and seven −40% years any way you like and the ending is always 2⁸ × 0.6⁷ = 7.17x. The order changes only one thing: how painful the ride is.

What the table hides

Look at the red line. In year 8, Portfolio B touches 6.91x. Two years later it is at 2.49x. It lost 64% of its value in 24 months. Then it does it again from year 13 to year 14.

Now look at year 14 specifically. Portfolio A is at 7.01x. Portfolio B is at 3.58x, half. B's ending only looks close to A's because, by luck, year 15 happened to be one of the good years. If you needed the money in year 14, for a child's university fees, for a house, for a parent's surgery, you would have cashed out with half of what the tortoise had.

Portfolio A also has red years, three of them. They are shallow. That is the entire difference.

"But B's average return is more than double!"

It is. And that is exactly the trap, so let me be precise about it.

Take the fifteen yearly returns of Portfolio B and average them. You get +34.7% a year. Do the same for A and you get +15.7%. On paper, B is more than twice as good.

Now look at what compounding actually delivered. A: 15.0% a year. B: 14.0% a year.

Twenty percentage points of "average return" evaporated. Where did it go? Into the arithmetic of losses. A +100% year followed by a −40% year is not +60%. It is 2.0 × 0.6 = 1.2, or +20% over two years. And a −40% year needs a +67% year just to get back to where you started. Losses and gains are not symmetric, and the bigger the swings, the bigger the gap between the average you brag about and the money you actually have.

Compounding does not care about your average. It only cares about how deep you fall.

In finance this has a boring name, volatility drag. In my old job we would have called it the difference between the mean of the training set and what the model does in production. Same idea. The average is not the thing you get to keep.

The price that isn't in the table: your mental state

The simulation above is a spreadsheet. It assumes a person who sits through fourteen years of ±40% swings without doing anything stupid. I have met very few of those people. I am not sure I am one of them.

In the real world, Portfolio B means: put in US$6,000, watch it become US$3,600. And if the bad years arrive back to back, as they did in the simulation, US$2,160. Are you actually going to sit still?

Because the −40% moment is precisely when the irrational decisions show up. Panic. Cutting losses at the bottom. Switching strategies. Or, out of pure desperation, trying to call the top and the bottom of every stock, which is neither realistic nor necessary for success in this business.

And remember: in the real world you do not get the schedule. You will never know in advance which year is the +100% and which is the −40%. The only certainty is that if you bail at the bottom, the compounding is broken right before the part that would have paid you.

So in practice, Portfolio B's real-world result is usually worse than the simulation, because the simulation assumes nobody flinches.

The second price: your time

Treasure hunting eats time. Screening hundreds of tickers, watching the group chats, late nights on annual reports of companies you will never buy. All of that to find one needle.

Now imagine spending that same time on something with a far higher hit rate: your job, or your business. The output of that effort becomes extra ammunition for Portfolio A.

Suppose you add just 10% of your original capital to Portfolio A every year, out of earned income. Fifteen years later A finishes at 12.8x instead of 8.1x. Nearly double Portfolio B. The tortoise, fed regularly, is not even a close race any more.

We eat with money, not with percentages

This is the sentence I would most like people to take away.

Investing is not a competition for the highest return. It is a search for the most stable return you can compound a large amount of money on, for a very long time.

That distinction is also why the wealthy keep getting wealthier without doing anything heroic. 15% on US$600,000 is US$90,000 a year. To earn the same US$90,000 from US$60,000 you would need +150%, every year. One of those is an investment strategy. The other is a lottery habit.

A larger base plus a consistent strategy beats a small base plus a miracle. Nobody who is already rich needs to hunt dragons. That should tell you something about how the rich got there.

Closing

One honest caveat, because I don't want to oversell a spreadsheet: this is a stylised simulation. Real returns are not this neat, and a real 15%-a-year portfolio is hard work to build and harder to hold. The point is not the specific numbers. The point is the shape: shallow drawdowns compound; deep drawdowns, however exciting the recoveries, quietly tax you every cycle.

At Recompound we are not hunting the next multibagger. What we chase is more boring: consistent compounding with drawdowns kept in check, so that our clients can actually stay in the game until the end, without cutting losses at the bottom. Downside first. Upside takes care of itself.

If you would rather have the dragon, I understand. Just read this post again in year 14.

See you on the next one.

Disclaimer: This article is my personal opinion, written for educational purposes only. Nothing in it is financial advice, and nothing here is a recommendation to buy, sell, or hold any security. Client age figures are from our own records as of August 2026. Client messages are quoted verbatim but anonymised, with stock tickers masked, and shared with respect: every one of them could have been written by me at some point in my life. The studies cited are about smoking cessation and goal-setting, not investing; I use them as an analogy, not as proof that any investment approach works. Investing carries risk, including loss of capital. Please do your own research and speak with a licensed professional before making decisions.

There is one concept I believe in that I have never seen in any finance textbook:

People have to get wrecked first. Then, and usually only then, do they change for the better.

Indonesian has the perfect word for the state that produces this change, and since a good share of you reading this are not Indonesian, let me spend a paragraph on it, because the whole post hangs on it.

What "kepepet" means

Kepepet (roughly "kuh-PUH-put") comes from pepet, to press or squeeze. It describes being cornered: backed against a wall, out of room, out of options, out of time. It is the word you use when you finally pay the bill on the last day, or take the job you swore you'd never take, or sell the motorbike because the rent is due tomorrow. There is a well-worn Indonesian saying that the most powerful force in the universe is not love or money, it is the power of kepepet, because a cornered person will do things that a comfortable person has been "planning to do" for ten years.

It is not a pleasant word. It is also, after a few thousand user calls, the single most reliable predictor I know of whether someone will actually become a long-term investor.

Let me show you where that belief comes from. Spoiler: it starts with a number almost everyone guesses wrong.

The age question

The question I get asked most often at dinners, right after "so what do you actually do":

"How old are your clients, on average?"

Almost everyone guesses early twenties. Fresh graduates, first brokerage app, first taste of cuan (Indonesian slang for profit, borrowed from Hokkien). It's a reasonable guess, but wrong.

Our average client is 35. The majority are between 25 and 39. People in the thick of it: a career, a mortgage, a family, a first kid starting school. A good number are the sandwich generation, funding kids and parents at the same time.

When I first pulled this number, I was puzzled. Why not the young ones? They have the longest runway. Compounding should matter most to them, and they're the ones posting about stocks all day.

The answer only showed up after Toby and I had personally taken thousands of onboarding calls. The surface reason is always the same: "I'm busy." True, but not the real reason. If the conversation goes deep enough, a more honest sentence comes out. It's phrased a hundred different ways, but it always means the same thing:

"Jatah fuck-up gue udah makin tipis."

Literally: my fuck-up allowance is running out. Jatah is a ration or quota, the kind you get for rice or fuel. The clients' phrase, not mine, and I've kept it because no polite translation carries the same weight.

The allowance

Everyone starts adult life with a quota of financial mistakes they can afford to make. It isn't written anywhere. Everyone knows it's there, and everyone spends it.

Following a friend into a stock. Chasing the hot coin. Hunting the next multibagger. In Indonesian retail slang, hunting cacing-cacing naga-naga: "worms and dragons". A cacing (worm) is a tiny, illiquid stock, often trading near the exchange's minimum price; the dream is that your worm turns into a naga (dragon), a ten-bagger. It's a lottery ticket with a ticker symbol. Going all-in with Rp 10 million (about US$600) hoping it becomes tens of billions. Or the slow-motion version, which is the most common one I see: investing for years, making great money in the bull market, and giving all of it back in the bear market.

At 22 this feels like an adventure. At 35 it feels different, because life's invoices have arrived: household costs, school fees, a parent who needs help. And you look back and realise that after years of "investing", the money has not actually gone anywhere.

The science has a name for this

For a long time I thought this was just a Recompound observation. Then I went looking, and it turns out medicine has been documenting exactly this pattern for decades. They call it a teachable moment.

Take smokers. Doctors tell them at routine check-ups, year after year, that smoking will kill them. In studies of that kind of routine advice, roughly 2 to 10 percent quit.

Now take smokers who have just had a heart attack. In one study of acute coronary patients, about 70 percent quit within a month, and two-thirds were still off cigarettes a year later.

One. more. time. The information is identical in both groups. Smoking kills you. Nobody learned anything new in the ambulance.

The only variable that changed was kepepet.

There is a gentler cousin of this, documented by Wharton researchers under the name fresh start effect: people's commitment to change spikes right after temporal landmarks. New year, new month, and especially birthdays. Turning 30. Turning 35. A first child. Quiet alarms, but they ring deep, and the message is always the same: your playing-around allowance is almost gone.

We watched this happen live in 2025

Theory is nice. Let me show you a teachable moment on the Indonesian stock market. A little context first for readers abroad.

In 2025, a group of stocks linked to Indonesia's big family conglomerates, saham konglo in local slang, went to the moon. Not "had a good year" vertical: hitting the exchange's daily upper price limit (locals call it ARA, auto reject atas) day after day, on valuations that had stopped meaning anything. Every group chat was on fire. We sat it out, and we got criticised for it, including by our own clients. We were stubborn as a rock. Here is a sample of what landed in our WhatsApp that year, verbatim, anonymised, tickers masked, with translations:

"Fomo ga sama sahamnya Pak 😂" (July 2025)
Aren't you FOMO about Mr 's stocks? 😂

"Kalo yg paling mending berjudinya yg mana bro? B＊N apa P＊O? Hahaha" (July 2025)
If I'm going to gamble, which one's the better bet, bro? B＊N or P＊O? Hahaha

"ALL IN B＊N BOYSSSSSSSS!! MASIH MURAH JANGAN KETINGGALAN KERETA!!!" (October 2025)
ALL IN B＊N BOYSSS!! STILL CHEAP, DON'T MISS THE TRAIN!!!

"Asik bgt saham konglo" (26 January 2026)
Conglomerate stocks are so much fun

Look at the date on that last one. It was sent one day before MSCI sent what I've come to call its love letter to our exchange.

On 27 January 2026, MSCI, the index provider whose classifications decide where trillions of passive dollars can go, put Indonesia under review for a possible demotion from Emerging Market to Frontier Market status. The behaviour of exactly those conglomerate stocks was one of the main triggers. These stocks collapsed. Yesterday's daily upper limit became today's daily lower limit (ARB, auto reject bawah), berjilid-jilid, volume after volume, like a bad soap opera. At its worst, the Jakarta Composite Index was down about 42% from its peak.

And the same people who sent those messages? Tobat. Repented, in the full religious weight of the word. Some had the courage to cut their losses and then genuinely changed how they invest. Others surrendered, stuck in their positions, waiting for the price to come back to what they paid.

From total euphoria to wrecked to repentant took about one year.

I'm not sharing this to gloat. Being batu for twelve months while your clients call you old-fashioned is not fun, and I'd have preferred to be proven right in a cheaper way for everyone. I'm sharing it because it is the cleanest teachable moment I have ever watched in real time.

And then they actually change

This is the part that makes me keep believing in kepepet rather than resenting it.

Once someone is cornered, they genuinely change. The client who was all-in on a dragon stock last year is now asking about moats, valuation, whether the dividend is sustainable. Their portfolio stops being a casino and starts being a compounding vehicle. Slow, but more sure, towards financial freedom and a retirement that doesn't depend on guessing blindly.

That is the power of kepepet. It is not a nice power. It arrives as a heart attack, or a 42% drawdown, or a school bill on the same day as a margin call. But I have never seen anything else work as reliably. Not books, not YouTube, not us.

Closing Remarks

You can't manufacture kepepet on demand, and I wouldn't wish it on anyone. But you can borrow a little of it before the market lends you the real thing at a much higher interest rate. Two things.

One: write the sentence yourself, today. "My allowance runs out on (date)." A year, an age, an event: first kid, fortieth birthday, parents retiring. Then put that date in your calendar with a reminder. This isn't about discipline. It's about turning a vague feeling into a concrete thing, which is exactly what the fresh start research says actually moves people.

Two: send this to the friend who is still hunting dragons. Not to lecture. Just while their allowance is still there. A teachable moment delivered by a friend costs a lot less than one delivered by the market.

And if you're one of the 35-year-olds who has already had your moment and would rather never have another: that is, more or less, exactly who we built Recompound for. Every client gets their own WhatsApp group with us, and the penguatan iman (faith reinforcement, what our clients call the pep talk they need during a crash) is free.

See you on the next one.

References

• McBride CM, Emmons KM, Lipkus IM (2003). "Understanding the potential of teachable moments: the case of smoking cessation." Health Education Research 18(2):156–170. Routine clinic advice: 2–10% cessation; hospitalisation or diagnosis: 15–78%.

• Acute coronary syndrome cohort (116 patients): ~70% quit at one month, ~67% abstinent at 12 months (Journal of Smoking Cessation).

• Dai H, Milkman KL, Riis J (2014). "The Fresh Start Effect: Temporal Landmarks Motivate Aspirational Behavior." Management Science 60(10):2563–2582.

• Marks H. The Most Important Thing (the six-foot man and the five-foot stream).

• MSCI review announcement, 27 January 2026; IHSG (Jakarta Composite Index) drawdown of approximately −42% from peak (Bloomberg data via @BagusPerdana_).

• Client age data: all active Recompound clients, August 2026 (mean 35.1, median 34, 72% aged 25–39).

Hypothetical. Not a real product.

Disclaimer: This article is my personal opinion, written for educational purposes only. Nothing in it is financial advice, and nothing here is a recommendation to buy, sell, or hold any security, or to buy or avoid any course, book, or programme. The Haaland masterclass is a made-up illustration. Jordan B. Peterson and Ray Dalio are mentioned only as public examples of well-known people who sell their knowledge; no criticism of either is intended, and nothing here implies their endorsement of anything I write. The Indonesian practitioner referred to below is deliberately unnamed; the details of their journey come from their own public interviews. Investing carries risk, including loss of capital. Please do your own research and speak with a licensed professional before making decisions.

A bit of context for readers outside Indonesia, because this post won't make sense without it.

In Indonesia, selling investment courses for a fixed fee is not a niche. It is an industry. The founders are genuine celebrities on mainstream social media, they are on every podcast, and every few months one of them launches a new programme with an annual subscription that makes people choke on their kopi. Think of the trader-influencer scene in the US or India, then add a market where most participants are first-generation investors whose parents kept everything in property and gold. Demand for "teach me how" is enormous, and the supply has grown to match it.

I should also name my conflict of interest before you find it yourself. These businesses are, in a way, Recompound's antithesis. They charge a fixed fee to teach you to do it yourself. We charge a performance fee to help you do it. So read what follows knowing that, and judge it accordingly.

Because what I want to say is not what you'd expect from the antithesis.

Erling Haaland opens an online course

Here's a thought experiment I use with new clients, and it settles the argument better than any social media thread I've seen.

Haaland launches "How to Become a World-Class Premier League Striker." US$1,500 a year, about Rp 25 million. The syllabus is genuinely daging (an Indonesian compliment: "all meat, no filler"): how to improve your shot conversion rate, how to exploit set pieces, the recovery routine of a top player, the diet, weekly tactical breakdowns. Big yellow JOIN NOW button.

Is the knowledge real? Hell yes. The man teaching it is one of the best strikers alive. The Golden Boots are real, the goals are real, the salary is real. Nothing in that syllabus is a scam.

But that was never the question. The question is:

Do you become a Premier League striker because you paid for the class?

Could you? Sure. But what are the actual chances? You'd have to quit your job, train full time for years, eat like a monk, and get injured, repeatedly, on purpose. Haaland's knowledge has never once been sold separately from Haaland's process. It can't be. The process is the product.

Legends sell their knowledge too

Haaland is hypothetical, but the pattern isn't. Look at who else sells what they know.

Jordan B. Peterson sells online courses, on writing, on psychology, on how to run your life. Millions of people have paid for them.

Ray Dalio sells books. Principles, for about the price of a lunch. And this is the one that looks properly counter-intuitive, because Dalio founded Bridgewater Associates, for years the largest hedge fund in the world. Why would the man who runs Bridgewater sell you the manual for how he does it?

Because the manual is not Bridgewater. Dalio can publish every principle he has ever written down, and you still cannot run Bridgewater. Warren Buffett has been publishing his entire philosophy in free shareholder letters since the 1960s, and there is still only one Berkshire. The knowledge can be sold cheaply, or given away, precisely because it is not the scarce part. The scarce part is the forty years, the team, the discipline under fire, and the mistakes that were already paid for.

None of these people are frauds. They are simply selling the only thing about themselves that can be packaged.

Now replace the word "striker"

Replace it with anything you admire. Trader. Investor. Founder. Surgeon. The pattern is identical every single time, and that is why I want to be very clear about what I am not arguing.

I am not arguing that the people selling investment courses did anything wrong.

Take the practitioner behind the latest expensive programme in Indonesia. I've listened to enough of their interviews to believe they made it, for real, from the market. Not from selling courses about the market. From the market itself, first, and for years before anyone knew their name. The knowledge is real. I respect people like that, whether they call themselves traders or investors. And I say that as someone whose own investing education was otodidak (self-taught), paid for with real losses, which is a tuition fee you can only pay in cash. Nobody gets a discount on that one.

So no, there is no takedown coming. Something more useful, I hope.

The price that isn't on the brochure

Here is what I would print on the enrollment page if it were mine to write. All of it is what the practitioner has said about their own journey, in their own words, across various podcasts.

Analysing the market morning, noon and night. For years. Not a weekend hobby: a full-time job.

Sitting through brutal drawdowns when the market wasn't cooperating, and still executing the system while their mental state was in pieces.

Going negative on margin. Starting again from zero. At one point, borrowing capital from a friend to keep going.

And after all of that, still no guarantee of immediate success. The success came. It came after the part nobody puts in the highlight reel.

So the brochure says US$1,500 a year. The real price is the years, the drawdowns, the margin call and the friend who lent them money. And notice: that price is not hidden by the seller. It is hidden by the buyer, from themselves.

"But the guy really did make it from the market!"

Yes. That is exactly my point, not a counter-argument to it.

Haaland really did score those goals. That is precisely why his goals are worth nothing to your career. Somebody else's process, fully completed, is the least transferable thing on earth. You can watch every one of his goals and it does not add a single goal to yours.

The problem was never the class. The problem is what the buyer expects to happen after paying.

Somebody pays the subscription and quietly expects that five years from now they'll be financially free, no longer working, without having paid anything like the effort the teacher paid. That is not a knowledge gap. That is an expectation gap, and in this business the gap between expectation and reality is where nearly all the suffering comes from.

Not everyone can become a trader or investor who reaches financial freedom in five years. Not everyone can become a Premier League striker, or a surgeon. And that is not a disgrace. That is the base rate.

Three questions before you pay

Before paying for any programme like this, the honest questions are not about the teacher. They are about you.

1. Am I willing to sacrifice the profession and expertise I've spent years building? Because this is a full-time job, and you already have one.

2. Am I willing to dedicate myself for years, not months, to actually put this into practice? The teacher did.

3. Am I willing to carry a severe drawdown with my own money and stay disciplined through it? Not in theory. With the mortgage due.

If your answer to all three is yes: go for it. I mean that, and I'd be happy to be proven right about you.

If you paused on any one of them, keep reading, because the next part is the good news.

The good news

Most people, when they're honest, pause on at least one. That's fine. Here is what they forget:

You do not have to become Haaland to be financially free.

The world is full of people who will never score in the Premier League and are perfectly wealthy. They didn't buy the striker's masterclass. They did something a lot less glamorous: stayed in their own lane, kept earning from the thing they were already good at.

Howard Marks has a memo I keep coming back to, "Fewer Losers or More Winners". His point: the investors who end up on top over a long career are rarely the ones who chased the top decile in any single year. They are the ones who were consistently above average and never blew up. Haaland is a top-decile-every-year athlete. You do not need to be. You need to not blow up.

"Isn't this just you protecting your own business?"

Fair question. I flagged the conflict at the top, so let me be equally direct about what we actually do, and you can judge for yourself.

What I sell is the boring alternative to the masterclass: you don't quit your job, you don't stare at a screen all day, you stay focused on your own expertise and on being a decent husband or wife, and a licensed investment advisor (in Indonesia the licence is called Penasihat Investasi, issued by OJK, our financial regulator) does the stock research.

Two things I would demand from anyone offering this, including us:

First, your money stays in a brokerage account in your own name. It never moves to us. We cannot run off with it, because we never touch it.

Second, you only pay when your portfolio grows. If we don't perform, we don't get paid. Our incentive and yours point the same way. This is the exact opposite of a fixed-fee course, where the seller is paid whether or not you ever make a rupiah.

And honestly, my own returns don't matter much to me. What matters is your return, and every other client's. If only we make money, what's the point? That's why we publish the returns of all our clients, calculated the way a mutual fund calculates its net asset value, updated daily, at recompound.id/performance. No sign-up needed. Past performance, as always, guarantees nothing.

What we cannot promise

I can't make you financially free in five years the way the practitioner did it for themselves. Nobody can promise you that, and if someone does, that promise is the most expensive item in the brochure. Kita bukan dewa. We are not gods.

What we offer is slower: compounding that is steady rather than spectacular, with drawdowns kept in check to the best of our ability, so the journey doesn't give you a heart attack and you can actually stay in it until the end.

If you're looking for a striker's masterclass, buy one from a striker. Just read the brochure twice, including the part that isn't printed.

See you on the next one.

The first half covers the supply side: four parties who profit from your transactions regardless of whether you win or lose — from pump-and-dump stocks (Saham Gorengan), brokers/RMs paid per transaction, influencers, to paid stock groups.

The second half covers the demand side: two habits of mind that make anyone — no matter how smart — an easy target.

Today’s post is a light one and I will be writing about how to make sure that you never compound your wealth. There is a popular method that has been written by famous investors, market participants, economics experts and the like. That method to kill compounding is very easy to grasp.

Buy at the top and sell at the bottom.

Now the popular emotion that allows us to behave in this manner is none other than fear and greed.

For example, when the market plummets like what we saw in Indonesia in June 2026, the fear disguises as prudence and we’d say to ourselves (sometimes in panic):

“I want to minimize my loss because the stocks can go down in price further,”

When the market reaches an all time high, the greed disguises as opportunism and we’d say to ourselves:

“I want to maximise my gains because an opportunity like this is rare, it’s different. It has never happened before. There is no risk”

Well, that is fear and greed in action and we know that these two folks are great at killing compounding. But I’d like to surface two more emotions that are also effective at killing compounding.

Spoiler: by virtue of our language, Indonesians will have it easier in understanding these emotions.

Before that, let me show you a flowchart of an investment process

In of itself, investing is a good problem. It is good because at the very least we know that we have wealth in the moment. But it is still a problem because it usually means we don’t know where to put the excess cash. For example we got a huge bonus or a huge inheritance or a huge business windfall and so on. If we let it sit in cash, it will be eaten by inflation.

So that’s where we begin. We assume that the excess cash amount is Z.

Step 1: Method Selection

Now we will look for all sort of investment solutions to solve this problem. It could be one or a mix of:

• buying mutual funds

• stocks DIY

• buying bonds

• participating in cryptocurrency

• index funds

• algo trading

• hodling precious metals and so on (kos2an, sell put options, rolex, artwork, fractionalised property gosh there are so many investing options nowadays isn’t it)

So lets assume that you settle with a method that seems appealing you most at the start. We call that, method X.

Step 2: Wait a bit

After the selection of method X and making your investments, perhaps from a combination of:

• heavy binging of YouTube videos

• asking your financially savvy friend

• looking at threads or twitter

• downloading popular wealthtech apps

It is time for you to do the most boring part. Waiting..

Step 3: Is it working?

At the start, you are still eager to check your investment performance and progress. You open the app, look into coverages to your investments in social media if any. And so on. Essentially you are into the phase of asking yourself.

“Is my investment working?”

It is a simple yes or no question.

Step 4: Darn it, it is not working.

An investor rarely gets a method X that works for them the first try. Usually caused by a combination of ego, inexperience, ignorance (basically being a normal human being). So there will be an exit from method X.

But the excess cash Z’ is still a problem. So there needs to be a new method Y that replaces the old method X. And usually, that new method Y is gated by an entry condition.

So two emotions that are effective in killing compounding

Lets be precise here. The thing that will guarantee you to kill the compounding are these two emotions that governs your exit condition from method X and your entry condition to method Y respectively.

These two emotions (like fear and greed) appear to go hand in hand.

One emotion governs the exit condition for method X. That emotion is kapok.

In English, kapok would be the feeling of saying to yourself “never again”. Knowing Bahasa Indonesia certainly does help here.

Another emotion governs the entry condition for method Y. That emotion is envy.

Why they come as a pair

Kapok does not just end method X. It changes the problem you walk into method Y with.

At the start, the problem was “where do I put Z”. After kapok, the cash is likely smaller, call it Z’ and the problem is no longer “where do I put Z’”.

It is “how do I get back from Z’ → Z, quickly”.

Psychologists have measured what that does to people. Someone who is underwater takes more risk than someone who is above ground. It is the same reason a gambler who is down at midnight is likely to make riskier bets at 1AM.

Now, a person who is looking for a quick recovery needs a candidate. Envy supplies with one. Note what kind of candidate envy supplies. Not a random method. The method that has just gone up the most, in someone you can see. Which is precisely the method that is most likely to be at its top.

I’d argue that the emotions aren’t disjointed. They are more like supply and demand. Kapok creates the demand for a fast recovery. Envy supplies the fastest looking one.

“Bro gua invest di sini baru setahun cuan udah 50%” - ”Bro I invested here for a year and I am up 50%”

Neither does the full damage alone. Kapok without envy usually ends up in uninstalling your sekuritas app or liquidating all of your investments and putting them back into your savings account.

Envy without kapok is a temptation you can sometimes resist, because you are not underwater.

Together, they are a potent combination to kill compounding. Kapok is the sell at the bottom. Envy is the buy at the top.

And then method Y, bought at the top, is the one most likely to produce the next kapok. Kapok, envy, kapok, envy. Each round the drawdown is a bit deeper and the recovery has to be a bit faster.

Closing remarks

Enough cycles of kapok and envy in my experience produces something that puts a nail in the coffin for most investors. That is financial trauma. This can entail pronouncing a whole class of assets as a sham.

All of the sudden, investment universe of an investor becomes smaller and smaller. All the way until the investment vehicle they have to help them compound their wealth is pretty much nothing.

So I am not going to ask you to feel less kapok or less envy. Nobody can do that on request. I certainly cannot.

What you can do is to see the fuel for each emotion.

Envy needs a neighbour. Fewer methods in view means fewer neighbours, and fewer neighbours means less envy. This is case in point where having fewer options beats having more. For example, mute the group chat where the cousin posts his screenshots. That counts as an intervention.

Kapok needs a clock. Decide the date, call it a deadline, on which you will judge method X, and put it in your Google calendar. Until that date, “is it working?” is not an open question. Not because you are disciplined. But because you’ve set Google calendar.

Neither of these requires you to be a better person tomorrow in “controlling your emotions”. I certainly don’t quite believe in being able to do so. Maybe a post on this next time.

Cheers.

Disclaimer: Everything in this post is my personal opinion, written for educational purposes. It is not financial advice, and nothing here is a recommendation to buy, sell, hold, or switch between any security, asset class, or investment method. The neighbour and his 35% are illustrative, not a real return, and nothing in this post suggests that any method will beat any other. Noticing kapok and envy does not remove them, and no approach guarantees against loss. Please do your own research and consult a licensed professional before making investment decisions.

I was sitting down alone by myself in a jam packed bistro on a Saturday morning. The bistro was located at an office tower Kuningan. It was buzzing, full of patrons chattering to one another. Some were nodding curiously to their conversation partner. Some were laughing to what seemed like a funny joke. And a tiny fraction was patting one another on their shoulders.

We Indonesians have the reputation of being highly amicable, including to strangers.

Because yes, I know people that were conversing in that bistro were all strangers to each another. Yet they look like they have just met a new long-lost friend. That Saturday morning was not an ordinary Saturday. It was a Saturday where we experimented with gathering 36 of our customers together and got them to have a 1-1 conversation.

To be honest it felt strange for me because I have known many of them for a year or so but I’ve only known them through their corresponding WhatsApp groups. So to see the life behind the screen felt rather unreal.

By the way the name of the event is Quiet Circle. But it is definitely a misnomer because it wasn’t quiet at all. And we surely did not form any circles. We just had people in pairs talking 1 on 1. So it formed a line, not a circle. So a Loud Pair? Anyway.

I’ll come back to you about why we built this event in a bit, but because we are all about investments, I’d like to bring your attention to a hedge fund wizard who wrote a book.

Friends of the Good

The name of the hedge fund wizard is Demond Martin. Martin spent 21 years as a partner at Adage Capital, one of the world’s largest hedge funds, with AUM of more than $46bn as per June 2023.

Hold on a sec because before I continue, I am sure that you are expecting me to write about:

1. His investment philosophy or his wisdom in the capital market that we all can learn from.

2. Or his sheer perseverance as a person from a minority racial group to achieve extraordinary success in the finance space in the United States back in the days when black lives matter was not an active campaign.

Initially that was what I expected as well. Well those two were really just minor cameos. Each chapter of the book was an earnest description of one good friend to the next.

The entire premise of the book is simple:

“Success is never a solo act.
It is built in loyalty, shared belief, and the quiet power of friends committed to one another’s good.”

per this post was written, the quote above was directly copy pasted from

https://demondmartin.com

We love the phrase “self-made”. It is not a lie per se because our effort is real. But it’s a rounding error of a story because it inadvertently exclude everyone who play a part in our efforts.

Now lets think about life for a second.

• I bought my first stock in the Shanghai stock exchange in college because of my friend.

• I picked up Spanish randomly because of a friend and that annoying Duolingo.

• I started supporting Manchester United because Sir Alex Ferguson rang me up, gave me a hairdryer for looking at Chelsea. No, kidding. Because of a friend of mine in middle school too.

Friends honestly might be the largest position in a person’s life portfolio. And I’d have to be first to admit that it is the only position that rarely gets reviewed.

And when we review it, we use the wrong metric

The number one metric that we use to review the quality of our friendship is how pleasant it is to be around the person. A good friend is the one who’s fun. The one we party with, eat well with, watch the match with.

Sound familiar?

Well that’s usually how a new beginner investor picks stocks. If the position is green, therefore it is a good company. The price went up this week, therefore I was right. It usually entails pleasant feelings as a proxy for quality of investments. At least this is how Budi and I started. Eventually, investors would learn that bad price action ≠ bad quality. Good price action ≠ good quality.

So the right metric?

Back to friends. Martin’s definition of a good friend goes right to the fundamentals which is largely based on action. One that communicates genuine interest for you to become a better version. Which also supersedes how you might feel in the moment.

Example, I might feel terrible when my friend said that I was overweight and I needed to subscribe to a gym membership and gym together with him. But on hindsight, that painful suggestion was a good indication that the friend, is truly a good one.

So the friend who tells you the business plan has a hole in it. The one who asks how you’re actually doing and doesn’t accept “busy” as an answer. The one who says the thing you needed to hear at the precise moment you wanted to hear anything else. The one who asks you to stop procrastinating when it is really time to lock in.

Is the good friend who commits their action towards your betterment.

Quiet Circle

Unfortunately as Demond Martin argues, good friends are getting rarer nowadays. Especially amongst men, conversation might only revolve around Brazilian Jiujitsu and cultured running.

We can talk for three hours and disclose nothing. Work is “busy”. Family is “good”. The actual pains and hardships are parked neatly outside the conversation. Somewhere along the way we signed an unwritten agreement that disclosing our struggles would be a shame to us and a burden to the other guy, simultaneously.

Except that there’s a plot twist: that agreement doesn’t exist.

So let me finally explain what we actually did that Saturday morning.

At Quiet Circle we paired our customers 1 on 1, most of them complete strangers to each other, and had them take turns answering questions from a set we prepared. You answer, your partner answers the same question, then you both move on to the next one. No phones, no business cards, no distractions.

The questions themselves are the engine. They escalate in three levels: ice breakers to warm you up, brewing questions that goes deep a little, and deep talks that most people have never been asked out loud. Probably not even by the people closest to them.

In other words, it is the opposite of a networking event. Networking goes wide: you touch everyone in the room shallowly, collect thirty contacts, and make zero friends. Quiet Circle goes deep: one person, all the way down.

It is a setup heavily inspired by Nicholas Epley, a professor at Chicago Booth who designed a similar conversation event amongst hedge fund managers (coincidence that everything is about hedge fund managers in this post isn’t it?).

Example questions that were put in the event:

Ice breakers:
”What’s a small hobby or useless thing you do just because it’s fun, not because you want to be good at it?”

Brewing:
”What’s something you envy in other people, and what do you think that envy is trying to tell you?”
”What advice do you find yourself giving to others that you don’t actually follow yourself?”

Deep talks:
”If all your titles, degrees, and businesses vanished tomorrow, who is the person that remains?”
”If your younger self could see your life now, what would they be proud of and what would disappoint them?”

Before we continue, how would you feel about answering those questions to a complete stranger?

Indeed before the event, I briefly asked some participants predicted how it would go. Consistently, they will predict:

It will feel awkward

And perhaps because people believe that they aren’t good communicators.

Then people went in to have the conversation, answering these tough tough questions to each other. Then hearing each other’s responses carefully.

But.. the awkwardness never showed up. People enjoyed the deep conversations very much as they felt connected to the stranger across the table. My favourite part, people were consistently surprised by how much the other person cared about what they had to say.

So essentially, this is the funny conundrum. Everyone in the room wants a deep conversation. But everyone in the room also thinks that they are the only ones who want to have a deep conversation.

To me this sounds like a mispriced asset

Everybody sees this activity as a risky one: I will be judged, I will feel a bit ashamed, and so on. But the return everyone is ignoring, new connection, shows up almost every time. So we are not really bad at friendship afterall. We are just bad at forecasting friendship.

That distinction matters, because it means the loneliness of surface-level friendship is not a character flaw. It’s a forecasting error. And unlike character, a forecast can be corrected by simply looking at the data.

Further, we have learned that when reality is better than expectation, we get none other than excess returns 😎 (of course not financial advice haha).

Closing remarks: the real heroes

Let me close this essay with Martin’s premise.

Success is never a solo act. Remember, the man managed money at one of the largest hedge funds on the planet, and when he finally sat down to summarise his life, the table of contents came out as a list of friends.

This got me wondering what my own table of contents would look like. The college friend who got me to buy my first stock in the Shanghai Stock Exchange. The friend who tricked me into Spanish. The middle school friend who handed me Manchester United, which some seasons feel less like a test of patience (sighpie). The friend that got me to wake up at 5.45AM to go for 40-50 mins runs.

And honestly, a few chapters would be filled by our customers, because a lot of what Budi and I know today was learned from them.

Compounding wealth is a hard thing done over a very long period. And I’ve come to believe what Martin believes: to do hard things over long periods, good friendship is not really a nice-to-have, it really is indispensable.

The real heroes of your story are probably already in your contact list. They are the largest position in your portfolio. Maybe it is time we review it like one.

Cheers.

Special thanks to Dr. Rindang Asmara from 1,000 Days Fund who passed me Demond Martin’s book out of the blue. I am running a marathon for them so I am going to shamelessly ask you to visit this page and donate. Shoutout to Quiet Circle attendees (hope you had fun) and all customers turn friends and the other way around. To our readers, may you be able to forge great lasting friendships in this one!

Disclaimer: Everything in this post is my personal opinion, written for educational purposes. It is not financial advice, and nothing here is a recommendation to buy, sell, or hold any security. Understanding a business better does not eliminate the risk of loss, and no approach guarantees a positive return. Please do your own research and consult a licensed professional before making investment decisions.

p.s. shout out to Telin and Nadia Harsya for the kind opportunity.

I have attempted to write this essay a number of times.

In a nutshell, Budi the investment advisor was invited to present at Telkom. Room full of managers, a few VPs. It makes us sound like a big company that is main stream, and I’ll admit that it is a nice feeling when you still spend half your week explaining to people how Recompound works.

But every time I drafted that version I got three paragraphs in and stopped, because I could not answer the only question that matters: what am I actually trying to say?

A post about presenting at Telkom is a post about us. And nothing that happened in that room was about us.

In the presentation, Budi had spent about forty minutes explaining that a share is a piece of a business. That when you buy stock, you are buying a slice of a company’s ability to generate profit. Not a lottery ticket.

Then a man put his hand up and said, roughly:

I still don’t understand stocks. I particularly do not want to invest in Indonesian stocks because of the depreciating Rupiah. Wouldn’t it be better to invest in a real business?

My first instinct was that this was a comprehension problem. Something about lack of financial literacy. Something we needed to explain better, or louder, or with more examples. Like showcasing long term depreciation of Rupiah vs USD. Or highlighting companies in IDX with double digit ROEs but traded at rock bottom valuations.

Boy that instinct was wrong because assuming that my instinct is correct, it means that we blame the user. And after much reflection, I don’t think that the hardworking Telkom employee is wrong.

I only have the language to explain why that is wrong because of a book I read for reasons that had nothing whatsoever to do with markets: Don Norman’s The Design of Everyday Things. A book about door handles. Stove knobs. Why I struggle with using the microwave, sometimes.

It turns out the market is a product of design too. Which has its own consequences.

The Norman Door

There is a door in your life that you push when you should pull.

You know the one. That annoying door with a flat metal plate on one side, handle on the other. You walk up, you push, nothing happens, and for about half a second you feel like an idiot. Then you pull, and you walk through, and you never think about it again.

These are now literally called Norman doors, which I find very funny. The man wrote a book explaining that bad design is not your fault, and his reward was to have every terrible door on earth named after him. There is an entire Tumblr of them, submitted by strangers, still going — which tells you the problem is not exactly rare.

The book opens by refusing to accept your embarrassment.

“When you have trouble with things — whether it’s figuring out whether to push or pull a door or the arbitrary vagaries of the modern computer and electronics industries — it’s not your fault. Don’t blame yourself: blame the designer.”

And elsewhere, the sharper version: human error is usually the result of poor design. It should be called system error.

I will come back to the man in the room at Telkom, but to get there — from a door handle to a stock exchange — we need the two ideas the book is actually built on.

A triangle

Now imagine yourself as a designer. You build a thing that is intended for use to your users. The thing you design is intended to solve your user’s problem. For example, if your thing is a door, that door helps your user solve their problem of entering the building.

Now designer has a model in their head of how the thing works and what it’s for.

The user also builds their own model of how the thing works from what they can observe.

And in between there is the product, the actual object, sitting there in the world.

Now the designer never gets to talk to the user. As Norman puts it:

“Good design is also an act of communication between the designer and the user, except that all the communication has to come about by the appearance of the device itself. The device must explain itself.”

The visible surface of the thing such as what it shows you, what it lets you touch, what it reports back is what Norman calls the system image. And whatever the user ends up believing about the thing gets built out of that surface, because there is nothing else to build it out of.

If the system image communicates the designer’s intent, you get a good door. If it doesn’t, you get a man standing in a lobby, pushing and pulling not knowing how to open the door.

Conceptual Model

There’s a proper name for the thing the user ends up with: the conceptual model. A conceptual model is your working story of how a thing behaves. The simulation running in your head that lets you predict what happens if you do X to that door.

And here is the part that gets people: a conceptual model does not have to be technically accurate. It only needs to be functional. You do not need to understand a refrigeration cycle to keep milk cold. You need a model that reliably predicts what happens when you turn the dial → the fridge becomes cooler or warmer.

Now a good and bad system image is not that intuitive to distinguish. Because as what the Norman door example above suggested, a bad system image means that it is confusing and frustrating to use isn’t it?

Well not really.

Norman’s own example is his refrigerator, and I like it because he is the one who ends up looking funny in it.

It had two dials. One labelled for the freezer, one for the fresh food compartment. So he built the model any of us would build: two dials, two compartments, two cooling systems. Turn this one to make that one colder.

Nothing about that is confusing. It is clean, obvious, and usable on the first try.

But it is also completely wrong.

There was one cooling unit and a valve dividing the cold air between the two compartments. Both dials fed the same machine. Which means every adjustment he made to one compartment silently moved the other.

So he would turn a dial, wait a day for the temperature to settle, find the result wrong, turn it again, wait another day but never quite converging.

Lets sit with what that means. He was not confused, and he was not careless. He was operating correctly and intelligently against a model the appliance itself had handed him. The two dials told him there were two systems where there is actually only one.

That is what a bad system image actually does. It does not leave you confused because confusion at least makes you stop and ask someone. It hands you a clean, confident, wrong model, and then you act on it competently, for years, wondering why the results never quite come.

So, the product here is the capital market. What is its system image, and what conceptual model does it hand you? What is supposed to happen when you buy a share of a company from the stock market in your mind?

What the market shows you

Open your sekuritas (broker) app. Right now, if you like.

A column of four-letter tickers. A price beside each one. That price in red or green. A percentage change since this morning. A total at the top, also in red or green. A time selector that opens on 1D. Somewhere a running tape, and a headline about something a foreign official said last night.

That is the device explaining itself. That is the entire communication from designer to user.

Here is a Tuesday.

You do feel something in your gut after reading the above don’t you? Not to worry, I feel it too.

Now here is the portfolio on Wednesday, one day after.

Do the underlying businesses change? Astra? BCA? Mandiri? Telkom?

Well most probably nothing happened to any of those company. The board of directors are the same, business model is the same, marketshare is pretty much the same.

The only thing that changed was the colour of your app.

The colour is not innocent btw. The colour tells you on Tuesday to ask if you should sell your position. On Wednesday, it tells you that you are clever and you should probably buy more. It does not have a memory and it does not mention about the details that you own.

So what conceptual model would a reasonable person build with this design? Well the answer is quite obvious:

This is a thing whose number moves up or down. My job is to guess which way it moves next.

That model is not a failure of intelligence. It is a faithful, accurate reading of the interface in front of them. It is what the device said.

Here is the whole thing in one picture.

On the left corner, the market is what the thing was built to be. On the right, what people actually end up believing it is. Those are not the same sentence, and they are not even about the same subject. One is about businesses, the other is about a number.

And the thing is, it is actually a pretty darn good design

This is the part I got wrong for quite some time.

That interface is not incompetent. It’s superb.

Price, volume, spread, order book, time, volatility. For a trader, that is a beautifully designed cockpit. Every single element maps directly onto a decision they have to make in the next few hours. The feedback loop is tight, fast, and honest about exactly the thing they care about. If you handed a trader an interface that showed them a company’s ten-year return on equity and hid the bid-ask spread, you would have ruined their tool.

Good design is always good for somebody. The only real question is: for whom?

Well from how the interface was designed, refined, and marketed, it is no brainer that it is good design for people trading on a more short term time horizon.

So the interface was built for traders, but handed to everyone.

But the market has another job

Allowing people to trade is not the only reason why stock market exists.

If you strip it back, a business is a unit through which a society converts effort into value. The capital market is the invention that lets those businesses raise money to build more of it such as factories, hiring, distribution, research. And then it lets ordinary people own a share of the result.

Growth on one side, participation on the other. For all its imperfection, I believe capital market is one of the most significant invention of modern human civilisation.

So consider the other user. Not the trader. The doctor in Surabaya with a busy practice, the founder with cash flow she doesn’t want sitting in a deposit account, the Telkom VP with twenty working years ahead of him. Their goal is: own a piece of Indonesian productivity for the next two decades and don’t screw it up.

Now hand them that same screen.

Norman has a word for the relationship between what you’re trying to do and what the interface lets you perceive and control. He calls it mapping. Good mapping means the controls line up naturally with your intentions. For example, the stove knob that’s positioned like the burner it turns on.

For the long-term owner, the mapping isn’t just weak. There is essentially nothing on that screen that maps to their goal. Not one control, not one readout. Every visible element is about the next few hours.

Even worse feedback: confident about the wrong thing

Norman has an idea that I think is the sharpest tool in this whole argument. He calls it the gulf of evaluation: how hard it is, from what the system shows you, to work out what state the system is actually in.

Again, the market does not give you no feedback. It gives you excellent feedback. It just happens to be feedback about a state you probably should not care too much about as a long term investor.

If your goal is to own a productive business for twenty years, the state you need to evaluate is: is this business still earning more than it did, still run by people who are competent, still defensible? That state changes maybe four times a year or even less.

Imagine an alternative universe where you are not getting any feedback from these apps. You probably will go and try to find the real indicator. Business performance from public expose, information from the investor relations website, and so on. But the feedback is too excellent, so it does something worse. It convinces you that you are paying attention to the right things.

Benjamin Graham said the market is a voting machine in the short run and a weighing machine in the long run. I have read that line time and time again and understood it better through Norman.

The interface shows you the vote.

The business you actually own is the weight.

We keep checking the interface, so we reason around the interface. Not the actual thing.

Remember the Tuesday and Wednesday screens? Here are those same two days, drawn from a long-term view.

In your head those two days are miles apart. On the chart they are one dot, and you only had to be told where to look.

Good questions from good people

Now go back to Telkom, and look at what people asked in the Q&A.

What will MSCI do to the Indonesian market. What happens if Trump tweets something tonight. Is the US market simply better than ours. How can equities work if the rupiah keeps weakening.

I want to be careful here, because the easy read is that these are questions from people who should know better. Majority managers and above. Some VPs. Smart, ambitious people who run functions inside one of the largest companies in the country.

They were not asking bad questions. Given their conceptual model, they were asking the correct questions.

If you believe you are holding a number driven by news, then studying the news is the rational thing to do. Every one of those questions is well-formed and exactly what a competent person would ask.

And the man who said he’d rather invest in a real business? Under Norman that isn’t a contradiction at all. It’s a coherent sentence from someone whose conceptual model of “stock” is a screen and whose conceptual model of “business” is a thing that makes money. Two dials, two systems.

He was not failing to understand Budi.

He was telling us, precisely, that the system image had never communicated the design model to him. Forty minutes from Budi was up against twenty years of a screen.

Taught helplessness

There’s a cost to this as Norman describes the loop precisely: you fail at something, you conclude it’s your fault, you conclude you can’t do this kind of task, and you stop trying. He calls it learned helplessness.

Saya nggak ngerti saham.

I have heard this sentence a lot. It is never said as a neutral fact. It is said the way people say they are bad at maths, with a sheepish smile and a small shrug.

But what they mean really is that they don’t understand MACD. Or Ichimoku, or the Kijun line, or RSI divergence, or Fibonacci retracement, or bandarmology, or flow. That is the syllabus they believe they failed.

Well, we don’t know most of that either.

I don’t. Budi doesn’t, the licensed advisor, the one standing at the front of that room. Ask either of us to read an Ichimoku cloud and we would have to look it up, and we would probably still get it inaccurate.

And we don’t feel stupid about it.

Not because we are clever, but it is because none of it belongs to the job we choose. The syllabus for the job we are doing is much shorter than anyone tells you. Am I buying this asset for less than its worth, or not?

That is most of it (not easy) but almost none of it is on the sekuritas screen.

So when somebody tells me they don’t understand the stock market. I believe that it is not really a human error, it is more of a human reading a product that is intended for a different set of audience.

So what to do

Here is the smaller, less inspiring, but actually works, thing to do. Two changes to your environment. Zero changes to your character.

One: turn off the price notifications. Remove the thing that reaches into your pocket to tell you about a variable you have already decided is not your variable. Takes about forty seconds, once, and then it is done forever.

Two: put one recurring entry in your calendar for the first quarter of each year, when the companies you own publish their full-year numbers. Not to trade on. To read. That is the other gauge, and since no app will ever surface it for you, the calendar has to.

Or of course if you are fortunate enough to have access to your Recompound dashboard, you can go there once a month and stay tuned for updates on the investment thesis published ;)

Norman’s actual lesson isn’t try harder, it is change the world so the right thing is the easy thing.

Cheers!

This article is provided for educational and informational purposes only and does not constitute financial, investment, legal, or tax advice, nor an offer or recommendation to buy or sell any security or financial product. The views expressed are those of the author as of the date of publication and may change without notice.

While the data and sources referenced are believed to be reliable and accurate at the time of writing, no representation or warranty is made as to their completeness or accuracy. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Before making any investment decision, you should do your own research and consult a licensed financial professional who can assess your individual circumstances, objectives, and risk tolerance.

Here we go! Btw I am running a marathon (basic). You can check it out after you finish this article.

Revisiting Law of Demand

Let’s forget finance for a second and let me take you back to week one of Economics 101. Maybe you might think: demand and supply. Well clearly you are an overachiever. We will be talking about demand. Just demand.

Now the law of demand says: when the price of a good increases, the quantity of goods demanded falls. Price up, buyers would stop buying the good as much.

But how much would the quantity demanded be falling if the price increases?

• By a lot?

• By a bit?

• or in proportion?

Now the “how much” is what economists call elasticity of demand.

If the quantity demanded falls sharply as the price rises, the good is elastic. If the quantity demanded barely moves as the price rises, the good is inelastic.

And what usually determines elasticity is this: substitutability (blah very hard to pronounce).

If a good has plenty of substitutes, its demand is elastic. For example, if the price of beef increases, people can simply switch to chicken, so the quantity demanded for beef collapses. To visualize:

But if a good has no real substitute, its demand tends to be inelastic.

The textbook example of an inelastic good is salt. Let’s say tomorrow the price of salt doubles, people will whine a bit but they will still buy the same amount. Nothing else does what salt does, and nobody quits salt because it got expensive. To visualize:

Which leads to a naturally interesting question, doesn’t it?

An S&P 500 index fund is also a good that you can buy. So… is it elastic, or inelastic?

And why does it matter?

It is inelastic

Unlike shares like Apple that has obvious substitutes: if Apple looks expensive, you can buy Microsoft, or Google, or two thousand other companies. S&P 500 is structured differently. Because it attempts to help you buy equities as a whole, not just this stock or that stock.

If your money is programmed to buy equities as an asset class, there is not many substitutes that are quite like it so its inelasticity is intuitive.

But how inelastic?

Smart economists have measured exactly this. Xavier Gabaix (Harvard) and Ralph Koijen (Chicago) put a number on it in a paper titled *The Inelastic Markets Hypothesis.* They found that aggregate demand for stocks is so inelastic that every $1 flowing into the market pushes up total market value by roughly $5.

Furthermore, follow-up research shows the market has been getting more inelastic as the years progress, decade after decade.

Mind boggling isn’t it? Especially the follow up research. How is it gotten more and more inelastic over the years?

Because why won’t the active funds exploit the increasingly inelastic behavior of equities as an asset class? If there’s blind money that buys up assets without looking at the price, smart money should instantly sell to that overpricing. That’s just how the market is supposed to work, in theory.

But S&P500 behaves more and more like salt in practice.

Rise of passive index funds

In 2000, roughly $1 in $10 in US stock funds was indexed. Today it is roughly $2 in $3. In fact, passive funds crossed the 50% line in 2019, when index fund assets overtook active for the first time (~$4.3T each in US equity funds),

On the other hand active investors, according to Haddad, Huebner & Loualiche is on the decline. They measure price-checking active investors at 78% of the US market in 2000, down to 55% by 2019.

Now a passive index fund is characterised by a key feature: it buys at any price.

It does not look at valuations nor earnings reports. It does not really care whether price to earnings is 1x or 100x (or not have any earnings at all at the moment). It does not care about quality of management, business model.

It wants to go to Mars? Or it is selling cookies? It will buy the same amount if market capitalisation is the same.

To put it simply, if a $200 million market comprises of

Stock A valued at $100 million

and stock B valued at $100 million

The index fund’s exposure will be:

Despite the fact that stock A could be unprofitable trading at negative multiples or even without revenue. And stock B is already making tonnes of money, tried and tested to economic calamities and market crashes.

The index fund does not care. It just buys stock A and B altogether.

And justification is reasonable: extremely long investment horizon over 20 or 30 years, the entry price does not matter, so why bother?

Buying is also automated at the paycheque level

In the US, the moment John receives his salary, his 401(k) buys the index. Australia has superannuation, where employers must channel 12% of wage into retirement funds. The UK has auto-enrolment, where every employer is required by law to sign workers for a workplace pension. That is a minimum of 8% of earnings, flowing into a default fund, unless the worker actively opts out.

Pause and let these phenomenon sit in with you for a bit.

These things are happening in real time and these are massive pools of cash, regenerated monthly by the entire workforce of the developed world. And an ever-growing share of it is setup like that to buy automatically.

Now you might be curious, how big is this number?

Well, Americans hold $44 trillion in retirement accounts, of which $8.9 trillion is in 401(k)s. The fully-automated target-date funds was at about 8% of 401(k) assets in 2007. Today it is 38%.

And roughly 95% of younger workers’ contributions now default straight into them. In 2025, US passive funds took in $951 billion of net inflows while active funds had net outflow of $187 billion. US ETFs as a whole absorbed a record $1.48 trillion.

One single fund, Vanguard’s S&P 500 ETF (VOO), took in $124 billion in one year, an all-time record for any ETF. That is roughly half a billion dollars of buying, every single trading day, from one fund. VOO also became the first fund in history to cross $1 trillion in assets.

Add it all up and passive funds now hold 55% of all US fund assets, $19.4 trillion, up from 34% just a decade ago. Every year, the share of the market that cares about prices of individual equities shrinks, and the share that buys on autopilot grows.

Right so the autopilot demand is big, so what?

Well, circling back to the discussion on economics 101, the concern is that the market is exhibiting a behaviour like an inelastic good. And inelasticity has two consequences. Both of them are sitting right there in the data.

First consequence: it does not take much money to move the price.

When demand is inelastic, the curve is steep (see chart above if needed). Small changes in buying pressure produce large changes in price. Now, the entire US stock market is worth about $77 trillion. The net new money that flowed into passive funds in all of 2025 (an all-time high) was $0.95 trillion. Barely more than 1% of the thing it is holding up. Blue is the flow, grey is the stock.

And remember, the research says each net $1 of inflow lifts total market value by roughly $5. The sliver prices the entire grid. That is what inelasticity does: when almost nobody on the other side of the trade reacts to price, the marginal dollar carries enormous weight.

Second consequence and this looks weird: the market appears to be breaking the law of demand entirely.

Run the elasticity test from your Economics 101 class: the delta of price against the delta of quantity demanded. In 2025, the price of this good went up by 16% (returns is 17.9% with dividends) in a single year. What happened to the quantity demanded?

For beef, an 16% price hike collapses quantity demanded by 16%.

For the S&P 500, demand did not fall at all. It sets an all-time record. 👏

Now, a sharp reader will object to my causality here (I have to be careful because you folks are smart).

“Toby, the price went up because people bought more. That is not a broken law of demand, that is just demand increasing (curve shifting to the right). Movement along the curve different from a shift of the curve. Econ 101.5, remember?”

And you would be right. But notice what makes this market different.

In a normal market, causality runs in a negative feedback loop. When buying pushes prices up, there is a negative feedback mechanism to have buyers to opt out from buying because of higher prices.

That is the feedback that keeps every other good on earth tied back to reality. Beef gets expensive, people buy chicken, beef price comes back down.

For the S&P 500’s marginal buyer, the behaviour is different. The buying moves the price. The price does not move the buying behaviour. In fact, John’s 401(k) does not consult the price at all.

And this is not me eyeballing one lucky year of data. The economists measured the response itself. How much does buying actually back off when prices rise? For the market as a whole, the measured answer is almost none.

The demand curve is getting more vertical not because 2025 was special, but because a growing share of the buyers are, by construction, incapable of reacting.

Which is exactly why the whole thing has been working as it is.

And it surely will go on forever, right?

I mean it is baked in to the wages of the workers who keep buying the S&P500. So as long as people are employed, S&P500 will keep going up right?

Well… I am afraid it is not that simple. But I will do my very best to explain it simply 🙂

Imagine the S&P500 as a water tank. It has a tap that fills it in with water (money flowing in as people buying the S&P500). Now lets not forget that it also has a drain (money flowing out as people selling the S&P500).

So it is relatively easy to imagine if

the tap > the drain

Price go up more in proportion to the inflow (remember it is inelastic).

If the tap < the drain

Price go down more in proportion to the outflow (remember it is inelastic).

What is the drain then?

The drain is retiree redemptions. At some point, the workforce that has been working for 40+ years will retire. They will cash out and try to sell the assets that have been going into their account regardless of the price.

America in particular, is in the middle of what researchers call the “Peak 65 zone”: roughly 11,400 Americans turn 65 every single day. That is roughly 4.2 million per year through 2027, the largest retirement wave in the country’s history.

And these are the baby boomers, the wealthiest generation ever, holding the largest share of these assets. The US tax code literally forces them to sell: required minimum distributions start at age 73, whether they like the price that day or not.

You can take a look at the visualisation below to wit.

Furthermore, Goldman Sachs projects that in 2026, US pension funds will be net sellers of $200 billion of equities, and mutual funds will be net sellers of another $580 billion. For now the tap still wins: household and 401(k) buying outweighs the redemptions. But the drain side of the equation is not guaranteed to lose forever.

Of the top of my head, I can conjure up three events that can cause the drain to flow out faster than inflow from the tap.

Number 1: Recession

If unemployment rate increases, especially one that is driven by layoffs of high earning professionals, laid-off workers cash out their 401(k)s early to survive. During such an event, they’d need to buy groceries and they don’t really care if they are selling at a good or bad price.

Number 2: Foreigners heading home

Foreigners hold about 18% of the entire US stock market. They are quite fast moving too. In a few weeks around April 2025, foreign investors dumped an estimated $63 billion of US equities when Trump announced the unprecedented Tarriffs.

Number 3: Our good friend sentiment

Not all of the buying is automated through paycheques. Households buying ETFs in brokerage apps because the chart only goes up. Goldman pegs household buying at $520 billion for 2026, which is the single biggest source of demand.

If sentiment suddenly changes, and lets say household prefers emerging market index funds (which could happen overnight), then drain > tap.

Lets make the point more explicit

Which relates back to elasticity of demand. The S&P500 is an increasingly inelastic good said by smart geniuses in a relatively new paper. If that were to be true, this means that not only $1 in net inflow would cause $5 in increase in price. But also $1 net outflow would cause $5 in decrease in price.

Why? The price sensitive buyers would want to look for even more bargains before they start deploying capital. And the price sensitive buyers are getting fewer and fewer out there. The surviving ones likely will demand more bargains.

“So I have to stop buying the S&P 500? We get it Toby, you fearmonger”

Well, that is not what I am saying either. 🙂

I am not predicting a crash. I genuinely do not know when, or whether, the flows will flip. Nobody does which is rather the point. Demographics move glacially, governments can change rules anytime out of no where, and the machine could keep running for another month, year, decade or more.

The topic of discussion is narrower and, I think, more useful: to have a clearer picture of the engine behind the indices we are all buying.

Because I have personally seen many investors making an innocent looking but dangerous assumption:

“past performance, extrapolated from a chart, is a guarantee of future performance.”

without knowing what produced the past performance at all. We have seen how that movie ends, time and time again, in every era of market history.

Once you see the engine, you stop asking the unanswerable question:

“when will it stop?“

because I myself nor the smart ones nor the people in govt offices would know when.

A better and more useful answerable question (for you) is:

“am I well positioned for either outcome?“

You are still allowed to buy the index, everyone is. You are simply no longer allowed to believe that the returns it gives entails 0 risk.

There is always merit in seeing the risks in your investments, versus blindly investing because of a nice looking past performance chart.

Here is the irony to close: investing becomes less risky when we are well aware of the risks. It becomes more risky when we ignore them.

Thanks for reading all the way through! You now have a cool thing to say or two on your dinner table. Think your friends might find it useful? Go ahead and share it :)

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