Compounding in general terms is exponential growth. For some strange reason, us humans, we can understand the arithmetic series. 2+2 = 4, 2+ 2 + 2 = 6 so on and so forth. I wonder why this is? Evolution? We had to be quick on our feet. Fear, fight or flight response? What this implies is, if you to look compounding from a time perspective, we can realise short-term (arithmetic series) but not exponential growth which required a little longer to bear its magical fruit.
I have been fascinated by compounding and how it can deliver mind-blowing results. Being a Microbiologist, we are introduced to exponential growth early on when studying fermentation. Bacteria, when multiply, show exponential growth curve. My lack of lateral thinking meant I could not this principle to money. 🙁
The nature of compounding is such that they early you start, the better it is. I will have to pay a heavy price for my inaction because of my ignorance. I should have started investing in my early 20s, but here I am in my mid-30s. I have lost a considerable runway to allow compounding to do its magic.
One of the masters of compounding is Warren Buffett. He mastered this concept pretty early in his life, and most of us know what he achieved.
Another take on compounding is by Guy Spier. Guy applied the compounding principle to goodwill. Do good and in due time it comes around, multiplied. A small act of kindness returns to you as a gesture of bigger goodwill in the future. As someone who believes in Karma it makes sense to me. The caveat is, the action should be free of any set expectation. This is another pitfall, people’s actions are governed by ‘what’s in it for me’. Just do good because you want to, it feels good, and in due time it the act will return many times over.
I believe, what humans are not able to compute is the time element in the exponential growth and how small things can add up given sufficient time. Instant gratification has gotten the better of humanity, unfortunately.
Seeing ’cause and effect’ along the time axis is making me think more about the actions I take. I am happy to delay action if I am not sure but I will not execute on the half-baked thesis just to appear I am doing things. 🙂