The Essence of Compounding

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The Compounding

7 min readSep 27, 2019

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” -Albert Einstein

I have recently been pondering the question of: what ingredients enable someone (or something) to become successful? Is it talent? Practice? Perseverance? Timing? Or is it just plain, dumb luck?

Several authors have addressed this very topic. Malcolm Gladwell’s Outliers brought forth the 10,000 hour rule- in order to be world-class at something, you need to put in roughly 10,000 hours of practice. Robert Greene’s Mastery brought about a similar conclusion- people who mastered their craft spent years and decades developing their skills before they achieved mastery. Jim Collin’s Good to Great concluded that a great company differentiates itself by consistently applying great leadership, great understanding of strengths & weaknesses, great confidence, great focus, great determination and great discipline over the span of 15–30 years.

Of course, the above paragraph grossly oversimplifies the authors’ points, but at the core of all these books lies one unifying idea: that greatness and mastery can be achieved by consistently compounding good habits and actions over a long period of time.

When most people think of compounding, they think of compound interest. Most of us have probably learned the formula for continuously compounding interest in middle school as A = Pe^rt. Or come across one of those articles that quote Warren Buffet saying:

“Read 500 pages every day. That’s how knowledge works. It builds up like compound interest.”

Yet compounding is not just about reinvesting interests until you successfully end up with millions of dollars. It’s also not about reading every book until you’ve exhausted your local library. The true essence of compounding is that it can help us obtain success in every area of our lives. Of course, success lies in the eye of the beholder, but whatever it means to you, you can go out and achieve it. Below below are just a few examples of compounding in action.

Compounding Good Health

Compounding good health can be obtained by committing to healthy habits. Hitting the gym every day for 30 mins instead of binge watching Youtube videos, consuming a little more whole foods than processed junk food, going to bed an hour early to reach 8 hours of sleep. Although you may not reap the majority of the benefits immediately, these healthy habits will pay off massive dividends when your unhealthy friends start ending up in the hospital for various health-related issues.

Compounding Knowledge

Compounding knowledge can be obtained by committing to learning every day and going to bed a little wiser than you woke up. By constantly consuming various types of information and expanding your knowledge base, your mind will start to identify patterns and opportunities you would have never seen before. Take Warren Buffet, for example, one of the greatest learning machines on the planet. As Alice Schroder describes in The Snowball:

“Starting [at a young age] he’s read everything that he could find about business. The subject that interests him, he’s read newspapers, biographies, trade press. He went over to his grandfather who was a grocer and he read the progressive grocer magazine, and he read articles on how to stock a meat department. He’s gone to visit every company that he could find that was even slightly interesting to him, he went down to visit a barrel maker and spent hours talking about how to make barrels. He went to American Express, and he spent hours talking about that business, he went to GEICO and learned about the insurance business. He has stacks of reports on his desk from the companies he owns, pig stalls, jewelry, boat winches, everything you can imagine. He reads hundreds of annual reports every year from companies that he doesn’t own yet, because he just wants to understand their businesses, and then when the opportunity arises, then he’s ready and he can make a decision. What he’s really done is he’s created this immense vertical filing cabinet in his brain of layers and layers and layers of files of information that he can draw back on now for more than 70 years worth of data.”

Compounding a Healthy Mind

Compounding a healthy mind can be obtained by choosing what you expose your mind to everyday. Spending 30 minutes to read an educational book, rather than starting that new Netflix series. Choosing to meditate for 10 minutes instead of aimlessly scrolling through Instagram or Facebook. As James Allen puts it in As a Man Thinketh, “A man’s mind may be likened to a garden, which may be intelligently cultivated or allowed to run wild; but whether cultivated or neglected, it must, and will, bring forth. If no useful seeds are put into it, then an abundance of useless weed-seeds will fall therein, and will continue to produce their kind.” Find good seeds and ideas to plant in your mind garden and who knows what fruit they may bear down the road.

Compounding good relationships, compounding wealth, compounding sales, compounding coding and deep learning skills, compounding Medium post views, etc… The list goes on.

Dark Side of Compounding

It’s clear that compounding can result in successful results, but don’t forget to invert (“Invert, always invert!” -Carl Jacobi) and consider the flip side; just how compounding can bring about spectacular results, it can work against you to devastating effects. Repeatedly committing to negative habits day-in day-out will drive you down a near-inescapable rabbit hole. Just take a look at this diagram from Jeff Olson, author of The Slight Edge:

The bottom of that downwards exponential curve is not somewhere I wish anyone to be.

Concluding Thoughts

It seems that compounding can lead to some extraordinary results. But if it’s so powerful, how come not everyone is applying it? Why isn’t everyone the next Mozart? Or the next Federer?

Because the process of compounding is boring and tedious. In today’s age of shortening attention spans and numerous distractions, very few people have the patience and long-term view to commit to a 10-year horizon. And people who do end up taking the first few baby steps become discouraged after a few weeks or months because they don’t see the results they want. One key idea that people miss is that most of the time, the results are negligible. A 1% over yesterday is practically nothing… but an improvement of 1% everyday for several years? I certainly would not want them as my competition.

On top of that, imagine how difficult it must be to commit to something for several years. But those who have the perseverance emerge from their decade-long grind with a strong sense of purpose and tremendous grit (which is a topic for another day).

Let me end with a few excerpts from The Slight Edge that really summarizes the essence of compounding nicely:

“The things that take you out of failure and up toward survival and success are simple. So simple, in fact, that it’s easy to overlook them. Extremely easy to overlook them. It’s easy to overlook them because when you look at them, they seem insignificant. They’re not big, sweeping things that take huge effort. They’re not heroic or dramatic. Mostly they’re just little things you do every day and that nobody else even notices. They are things that are so simple to do — yet successful people actually do them, while unsuccessful people only look at them and don’t take action”
“Things like taking a few dollars out of a paycheck, putting it into savings, and leaving it there. Or doing a few minutes of exercise every day — and not skipping it. Or reading ten pages of an inspiring, educational, life-changing book every day. Or taking a moment to tell someone how much you appreciate them, and doing that consistently, every day, for months and years. Little things that seem insignificant in the doing, yet when compounded over time yield very big results.”

…

“So by now you’ve probably got a question burning in your brain. If these things are so simple and so easy to do, how come only 5 percent do them? Why don’t more people do them?
In fact, why doesn’t everyone do them?
“The first answer is one I learned from Jim Rohn: The simple things that lead to success are all easy to do. But they’re also just as easy not to do. ‘It’s easy to save a few bucks a day. And easy not to.’”
“The second reason people don’t do the little things that add up to success is that at first, they don’t add up to success….The things that create success in the long run don’t look like they’re having any impact at all in the short run. A penny doubled is two cents. Big deal.”
“The third reason most people live out their entire lives without ever grasping how the slight edge is working in their lives it that is just seems like those little things don’t really matter… The truth is, what you do matters.
What you do today matters.
What you do every day matters.”

Bid you everlasting compounding.

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