Not All Curves Are Lines

In his brilliant book “How not to be Wrong”, Jordon Ellenberg explains something basic that most human beings don’t realise in day to day life.

He writes and I quote- A line is one kind of curve, but not the only kind, and lines enjoy all kinds of special properties that curves in general may not. The highest point on a line segment as to be on one end or the other”

Most of the middle to upper middle class that makes decent money has an angst about the taxes that they pay.
Now consider the Following picture

The above shows higher the tax rate, higher the collection and this is what a socialist state aims for and that’s why you see politician.

However then came the “Laffer Curve”

The Laffer curve presents a unique picture which tells us if the tax rate is 0, obviously there will be no collection and if the tax rate is 100-no one will have the incentive to work so again tax collection will be 0.

Ultimately suggesting that the story will be somewhere in the middle that will optimize the tax rate and collection.

In practice it has been observed how the rich change tax jurisdiction to escape high taxation rates.

Linearity & Investing

Understanding linearity is perhaps the most important favor that investors can do to themselves.

This is an interesting curve for one of the most followed businesses in India.

If you had invested in 2002 and stayed invested, the returns today are 3651% or a compounding rate of 25%.

However, look at the curve from 2009 onwards till 2017.

An investor would have got flat returns and anyone who invested at the peak of 2008 (INR741) would have needed 9 years to merely break-even.

That same investor would have again encountered the 2008 peak price in March-2020.

That’s 12 years of lost opportunity.

However, if the investor had the patience to hang-in there, the compounded returns would still be a 10% which an intelligent investor will grab with both hands and run.

Understanding the non-linearity of returns and keeping the faith are 2 important traits that an investor can develop to make peace with their investment decisions and their outcome.

Lastly, here are some nuggets to ponder about:

“If the path before you is clear, you’re probably on someone else’s.”

– Joseph Campbell

“Of all the paths you take in life, make sure a few of them are dirt.”

– John Muir

2 thoughts on “Not All Curves Are Lines

  1. Great Post! Not everyone can postpone the pleasure of today… gratification is needed instant for most… Enoyed learning this new perspective.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s