Einstein's 8th wonder of world — Compounding, as applied in Life
This article is based on a common thread of thoughts across various walks of life — be it investing, career, personal growth and so on. The common thread is the discovery of the inflection point when results far outweigh the ongoing efforts. When money grows at a much faster rate than the ongoing contributions; when the efforts put in a job are far less than the results coming out of it; when the physical output of the body (in a race) is far faster then the recent routines; when your followers on social media engage with you more than it used to; and so on.
In my opinion, the common thread in all the above scenarios is Power of Compounding. As #Einstien famously said — “Law of Compounding is the eighth wonder of the world”; it actually applies everywhere. What is compounding? Compounding is multiplication of small contributions done on a frequent basis till a fixed time when the output results much more than a linear addition.As learnt in mathematics, Vs a simple interest (SI=P*R*T), it is CI = P*(1+R/n)^nT where P is principal, R is rate of return, n is frequency of contributions within T, and T is time period and is always higher than SI. The key elements in this power are — P, R,n & T.
Lets look at investing, if you keep focusing on these 4 parameters — Start the investing process early say at the age of 18 (T is on your side), pick instruments which give higher returns (R) & keep putting these amounts at high frequency (say small investment but every day/week/month/yr (n), so that amount invested grows faster (P); you are looking at financial freedom. SIPs in mutual funds is an implementation of the same idea.
Lets look at sports/fitness, if you need to run a marathon in a stipulated time, you have to start with a discipline of effort every day (frequent contributions); followed by increase in durations (5k->10K->15K and so on); multiplied by a duration of such effort. At one stage, you will realize that you are clocking a mile much faster, also the effort it needs to consistently clock a 5K is slowing down. Most runs get converted into easy longer runs Vs when you first started. That’s the inflection point. And what it means is that compounding of small disciplined efforts is now paving way for faster results.
Malcolm Gladwell, in his book, “Outliers” talks about 10,000 Hrs rule — If you invest 10,000 hrs into something; you master it. He says Why Beatles or Bill Gates were extraordinary success because the circumstances around their lives made them invest 10,000 hrs in playing or programming leading to mastery. Now, that’s to an extent is also a result of application of power of compounding.
Take Career. The effort needed to make the first sale obviously is more than when you have mastered it. First you apply more hours and make up for lack of skill through quantity; but later as you develop the networks, the persuasiveness; you put in lesser quantity as power of compounding of consistent action is on your side. That is precisely the reason, as why most successful people mention ‘Daily Habits’ as the number one reason of their success. Good things done daily make themselves excellent over a period of time. And that is exactly why great quotes like these exist -
“You will never change your life until you change something you do daily” — Mike Murdock. “Little strokes fell great oaks.” –Benjamin Franklin
Slow and Steady wins the race — from the Hare & Tortoise story, is nothing but power of compounding! Small but consistent contributions will result in far greater results vs infrequent sprints. That’s what stock markets are about. That’s what careers are about. And i think, that’s largely the life is about. Keep believing in the process, put in consistent efforts and you shall see the results coming through! Believe in the Power of Compounding. Ending this piece with another Einstein quote — “He, who understands the power of compounding, earns it and he who doesn’t pays it”.
