Before I begin, let me address the elephant in the room. You can still build substantial wealth even if you only aim to grow your wealth by 10% CAGR. Most of us reading this still have about 20-30 years to reach our financial goals, whether that’s retirement or legacy building. Combined with a prudent savings strategy, investing those savings at 10% CAGR will yield a 660% increase over 20 years, and a 1,700% increase over 30 years. Do not underestimate what a little bit of savings and compounding can do given enough time.

Secondly, just because you aim for 10% CAGR as a growth target doesn’t mean you’ll never achieve 15% CAGR. Think about it, a stock that has already climbed by 10% could easily climb by another 5%. The point is to actually be right rather than focusing on maximum upside, thus giving sizing and exposure a chance to work by not losing money.

Now I want to talk about why having a growth target of just 10% CAGR may be healthier than one with 15% CAGR. Firstly, I think it’s quite obvious that even a 10% CAGR target is better than having negative growth (i.e. losing money). Most investors in the stock market, if they are honest with themselves, tend to have a significantly higher growth target than the oft-stated gold standard of 15% CAGR. This leads them to take significantly more risk than is prudent, or that they are equipped to handle, given their circumstances. Having a 10% CAGR target is like putting on training wheels, or learning to walk before you run — it introduces risk discipline into the investment process until your process has matured to a level where you know how to keep your capital safe.

For instance, let’s say you’re just starting out as an investor in the stock market. With a 10% CAGR target, you’re less likely to invest in naked options or Bitcoin than if you were reaching for an overnight 2x or 3x return. Instead, you might invest in say PYPL, which has a 9x trailing PE; or LULU, which has a 10x trailing PE. While you’d be giving up attaining 2-3x gains in a short space of time, you’re also less likely to lose money by investing in these beaten-down stocks. This keeps your capital safe until your investment process matures to the point where you’re looking for risk:reward asymmetry over maximum upside.

It bears repeating that just because you’re aiming for 10% CAGR, doesn’t mean you can’t achieve 15% CAGR. As long as your call is right, there’s nothing stopping a stock which has gone up by 10% from going up by another 5%. The point is to avoid being wrong, which ends up in losing money.

Next, let’s talk about why reaching for risk:reward asymmetry should be the end-goal, rather than reaching for a fixed return in markets. When you buy a stock, you’re not investing directly in the company; you’re simply buying the stock from someone else. This person, who we shall call Mr. Market, is selling the stock to you at the market price, which is often at a probabilistic fair value. This means that the risk:reward implied in the market price tends to be fair given the future uncertainties of the business. Thus, rather than looking for a return by investing in the business per se, you should be looking for unfair mispricings in the market price where Mr. Market is selling the stock for a wrong price. This usually doesn’t happen by virtue of Mr. Market being completely wrong and having made an unforced error; but rather because the probabilities implied in the market price are factoring in completely different outcomes than what your (presumably correct) analysis has revealed. Combine this with a situation that offers downside protection (e.g. irrational depression), and you’ll come out ahead over successive transactions over the long-term.

What does this have to do with favoring a 10% CAGR target over say a 15% CAGR target? Firstly, it is simply a lot easier to find positive risk:reward opportunities yielding 10% over 15%. Even eschewing straightforward opportunities with a trailing 10% yield like PYPL, you train different mental muscles when you’re looking for 10% yield over 15% yield. As a natural matter, you simply end up taking substantially less risk when you’re only reaching for 10%, which allows you to focus on the goal of achieving an asymmetric risk:reward ratio rather than being obsessed with attaining maximum upside.

Secondly, having a 10% CAGR target helps to shift the investment focus to risk management. Think about it this way, what do you do with all that excess energy if you’re only looking to achieve 10% upside? You can now focus on reducing downside, right? This once again contributes to optimizing risk:reward asymmetry, where you achieve that not by increasing return but by reducing risk.

Thirdly, it helps to remember that investing in stock markets is a marathon, not a sprint. Sure, you get a dopamine high if you make a lot of money on a risky call, but can you repeat that success for the next stock? And the next? Over the long-term, every dollar you lose takes away from every dollar you make; and if you’re constantly reaching for maximum yield, you might just end up making less money over the long-term than if you had just lost less money.

Finally, it’s worth repeating that just because you aim to achieve 10% CAGR doesn’t mean you can’t achieve 15% CAGR. The way stock markets work, they tend to be irrationally exuberant when your call is right — so if the stock goes up by 10%, there’s nothing stopping it from going up by another 5%. This means that you might even end up achieving 15% CAGR without ever intending to! The point is to have a risk-focused mindset which puts a floor on the downside, which having a 10% CAGR mentality helps with, and which quite frankly also makes it easier to achieve a higher growth target like 15% CAGR in the real world.

I would be remiss if I didn’t echo all the quotes about adequate risk management which all the legendary value investors who have come before me have already said. So here they are in all their resplendent glory: