The strongest force in the universe is Compound Interest. — Albert Einstein
The High Probability Route to Becoming a Millionaire
Warren Buffett, the so-called Oracle of Omaha is a man who needs no introduction.
He is considered one of the most successful investors in the world and has a net worth of $82.5 billion, making him the third-wealthiest person in the world.
He amassed this fortune by perfecting the value investment philosophy pioneered by his former teacher Benjamin Graham. At its core this involves studying very deeply the annual reports of companies and picking stocks that appear undervalued but, crucially have real potential and pay dividends.
Buffett would take these yearly dividends — even though they may often be small — and re-invest them back into the same company stocks. This has the effect of compounding the returns he gets.
It becomes really apparent that compound interest starts to pay off over time. When you are persistent and consistent with your investment this patience pays off — and in a big way.
In fact, amazingly, Warren Buffett has made 99% of his money after the age of 50.
In his 2019 book Everyday Millionaires — How Ordinary People Built Extraordinary Wealth — and How You Can Too, Chris Hogan quotes research from Georgetown University that “88 percent of the millionaires in the author’s study have a bachelor’s degree”.
While a college education is advantageous, however, most millionaires don’t go to ivy league schools or have high-paying jobs. In fact, The top three professions are engineer, accountant and teacher.
Far from being hedge fund managers, it turns out that most millionaires are normal people with normal jobs. What sets them apart is their behaviour, not their yearly salaries.
Their secret is that they have used the very same fundamental principal used by Warren Buffett and harnessed the power of compound interest by investing in dividend-paying and tax-free retirement funds which compound over time.
What’s all this got to do with Knowledge?
“Read 500 pages every day. That’s how knowledge works. It builds up like compound interest. “
— Warren Buffett
The same secret weapon — compounding — can be utilised not just in financial engineering but also when it comes to knowledge acquisition and learning.
Most of us spend our time consuming information that has a very short half-life. When you read or watch the news most of that information decays quickly and is of little value even just a few days later.
Alice Schroeder, the author of Warren Buffett’s authorized biography The Snowball, describes how he focused on learning about companies that change very slowly.
And because this information changed very slowly too, he could compound his knowledge. This gives him an incredible advantage by creating a cumulative base of knowledge over time.
Expiring information is not knowledge. It won’t be relevant in a month or a year.
Key #1 — Focus on accumulating knowledge that will be as useful ten years from now as it is today.
Knowledge Needs to be Built on a Solid Foundation
“ Learners are not empty vessels waiting to be filled. They come to the classroom with preconceptions about how the world works; some of them are basically correct, and some of them are misconceptions.
Handbook of Learning Sciences — The Cambridge University Press
Evidence suggests that students learn new ideas by relating them to what they already know, and then transferring them into their long-term memory.
Problem-solving and critical-thinking are developed through feedback and depend heavily upon background knowledge and for students to transfer their abilities to new situations, they need to deeply understand both the problem's structure and context.
This is what is known as “A Priori Knowledge” (A priori literally means “from before”). This kind of knowledge depends upon what a person can derive from the world without needing to experience it.
First Principles — “A first principle is a basic, foundational, self-evident proposition or assumption that cannot be deduced from any other proposition or assumption.”
Elon Musk is widely regarded as one of the best proponents of this the world has ever seen.
“It is important to view knowledge as sort of a semantic tree — make sure you understand the fundamental principles, i.e. the trunk and big branches, before you get into the leaves/details or there is nothing for them to hang onto.”
— Elon Musk
As Michael Simmons has previously outlined in his excellent post:
How Elon Musk Learns Faster And Better Than Everyone Else
How is it even possible that Elon Musk could build four multibillion companies by his mid-40s — in four separate fields…
Musk’s superpower hinges on his learning transfer process which involves taking the foundational principles he’s learned in one field — for example artificial intelligence, physics, or engineering — deconstructing this knowledge into fundamental principles and then reconstructing them in another completely separate field.
Like Elon Musk, if you build up a reservoir of “first principles” and apply those principles to different domains you can suddenly gain the superpower of being able to go into a new field you’ve never learned before, and quickly make unique contributions.
Key #2 — Build up an inventory of rock-solid first principles
The Building Blocks: Mental Models & Chunks
Now that we have our bedrock foundations of first principles in place, we can build up our expertise by leveraging a closely related concept.
Working memory in your prefrontal cortex is very limited — it can only hold about 4 concepts at any one time. You can think of each of these concepts as “chunks”.
Definition — A chunk is a network of neurons that are accustomed to firing together so you can think a thought or perform an action smoothly and effectively.
You can learn more about how this works in a previous post:
How to Hack Your Brain for Accelerated Learning
An Introduction to Faster and More Effective Learning
If you create mental models then each of these “subroutines” can become a concept in memory — so the more sophisticated these become the more complex mental tasks you can complete in any given time
Experts are defined by the range of mental models they have created and have stored in long term memory
An example is playing golf, learning a language or playing an instrument. You can break all of these skills down to first principles and then combine them together.
By breaking information into groups of 3–5, you make it easier for your brain to remember information.
All polymaths and expert learners know that knowledge is based on creating sophisticated neural chunks that can be accessed and built upon at will.
So this is the bottom-up chunking process, where practice and repetition can help you both build and strengthen each chunk, so you can easily access it whenever you need to.
But there’s also top down big-picture process that allows you to see what you’re learning and where it fits in. Both processes are vital in gaining mastery over the material.
Context is where bottom up and top down learning meet.
To become a truly creative master of the material you’re learning you will need to leverage both the bottom-up chunking and the top-down approach all the while keeping the context in view.
Key #3 — Build ever more complex chunks to create expertise
Older Dog, New Tricks
Reserves of knowledge continue to increase with age.
In his 2007 Book, “The Art of Learning”, Josh Waitzkin describes how practice turns learned techniques into intuitive responses.
And once certain patterns become intuitive to you, that’s when the fun really begins. Skilled chess players are able to play with patterns, making small adjustments to confuse their opponents and gain advantages.
Kung-fu masters have simply trained so much that they have reached the point of fighting intuitively.
You too can get this good at any skill — but how? As the cliché goes, practice (more specifically deliberate practice) makes perfect.
By creating accurate mental models of how the world works and building more sophisticated chunks based on solid first principles knowledge you can, by compounding knowledge over time, become an expert in just about any field you want.
Psychologists distinguish between “fluid intelligence”, which is the ability to solve new problems, and “crystallised intelligence”, which roughly equates to an individual’s stock of accumulated knowledge.
People’s performance on vocabulary and general-knowledge tests has been shown to keep improving into their 70s. Experience can often compensate for cognitive decline.
So what are you waiting for? Start today!
Key Takeaways for Accelerated Learning
- Key #1 — Focus on accumulating knowledge that will be as useful ten years from now as it is today.
- Key #2 — Build up an inventory of rock-solid first principles
- Key #3 — Build ever more complex chunks and mental models by compounding your knowledge over time to create expertise
Learning involves creating useful mental models of the world around us. Gaining an insight into how our mindsets work together with the explicit use of cognitive and metacognitive strategies can therefore be optimally leveraged to enable us to learn faster and more effectively.
Learning is the central skill in today’s fast moving world — and will only become more important in the future.