Sep 19, 2021 • 10M

The Compound Effect

Changing Your Life from Linear To Exponential

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Dan from DJ Mentors
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What if we could shift our life from linear to exponential?

It sounds like a lot of work, but it may be more straightforward than it first appears.

The surprising difference is a matter of Time-Horizon.

The answer is not intuitive, and we often ignore its potential because of its uninteresting and lacklustre appeal.

How powerful is the force of compounding?

If you manage to get on the right side of the compounding equation and build momentum, nothing can stop you.

Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. - Charlie Munger

If a steam engine train is standing still, a small wooden block will stop it from moving at all, and a significant amount of force would be required to start the locomotive in motion.

Once the train picks up a critical speed, not even a brick wall could stop it in its tracks.

If you are not the one pushing the train to get it moving, you might end up being the one who gets run over.

It is In Your Best Interest

Most people take the idea of compound interest and associate it with money.

Warren Buffet is one of the kings of compounding money and is well known for his wild success as an investor.

The exciting fact is that Buffet has not generated the most outstanding percentage returns consistently.

His extraordinary net worth owes to the fact that he has been consistently investing since he was an adolescent.

He gave his money time to work for him.

As you can see from the graph below, the real magic occurred after Buffet turned 50 years old, having committed to investing consistently for 40 years.

Not All About Money

The compounding effect also applies to our life skills and pursuits.

Warren Buffet said "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."

In the end, our habits will far outweigh any other success metric in the long run.

Truly wealthy people know that behaviour is more important than what you know.

Small, but regular good habits will eventually add up if given enough time.

Small Things Accumulate

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

Let's say you spend $20 a day on food and put it on a credit card that you regularly pay 10% interest. After five years, you have paid $10,608 just on interest alone.

A similar pattern emerges when we closely analyse some of our life choices.

Our decisions add up over time.

A person does not become overweight from an all-you-can-eat session at the buffet after gorging on desserts. Instead, they get there incrementally over time.

The small choices that you make on a regular basis to have that extra scoop of ice cream. Such are the consistent habits and actions that will determine your outcomes in the long term.

It’s worth noting that things and activities you choose not to do will be just as important over time.

How To Start The Snowball Effect

Many of us spend our entire life rolling a snowball up a hill.

We push harder as we ascend higher.

Once we finally achieve our goal of getting to the peak with a critical mass, we end up in trouble.

Unfortunately for us, we end up on the downward slope of the hill as our exhausted frame is flattened to a pancake.

Most of us go wrong when we think we can create a new habit and decide to go all-out.

If you have ever failed at a new years resolution (which is all of us), you know that it's easy to lose steam.

We often get tired from overdoing because, in the beginning, it seems easy to stay committed.

It is much better to develop habits that you know you can follow through over a long period.

Just a slight change in direction will lead you to an entirely new destination.

Stick to the favourable course and double down in terms of long term commitment.

Like the tortoise and the hare, you don't have to be the fastest or the best, but you do have to be persistent and steady.

Go With The Flow

I remember going rafting on a trip to Israel, where we had several teams competing to finish first.

In the beginning, everyone on our boat was pulling their weight.

We all rowed furiously but didn't seem to be making much headway.

One by one, we stopped paddling out of sheer exhaustion.

Being the most stubborn person on the raft, I decided to go harder and eventually; I too was worn out.

Then a strange thing happened.

As soon as I stopped and relaxed, we started to pass the other rafts.

We started to have fun and saved our energy for steering the raft away from walls and rocks.

In the end, the water carried us to the finish line.

We didn't have to fight the current, and when we interrupted the natural flow, it slowed us down.

I realised that I didn't have to fight my way to success. I only had to be sure I was staying on track, observing the way, and focused on the current direction.

It's easy to forget that the slow path can be more rewarding in the long term.

Especially when progress seems so slow, but things that come fast usually go the same way.

Staying on track and building momentum is the simplest way to accumulate masses of skills and wealth one day at a time.

Story Time: The Chessboard

Once upon a time, there was an artist who made chessboards for high-end clients.

It just happened to be that one of his clients was a king who loved chess.

The artist had excellent craftsmanship skills. His chessboards were very special and unique.

No one else put as much detail in them, and almost every chessboard had different pieces, which made the artist’s work collectibles.

When he previously dealt with the king, he noticed that the king wasn't that good at math but was a very proud man that thought of himself as the wisest man on earth.

Knowing the kings' weakness, the artist devised a plan to trick the king into handing over an enormous fortune with the help of a chessboard and rice as his means of payment.

So the next time when the king wanted a new chessboard, the artist said to the king, "Your Highness, I don't want money or jewels for this chessboard. All I want is a little rice."

The king, who thought of himself as a clever man responded, "Hmm, I've got rice. How much rice?"

The artist replied, "All I want is for you to put a single grain of rice on the first square, two grains on the second, four on the third, eight on the fourth, and so on and so on and so on, for the full 64 squares."

"A chessboard full of rice, I can do that," said the king, not thinking how much rice that actually was. So he ordered his grainary to pay the man for the chessboard.

The king soon discovered that his promise based on "the chessboard and rice" turned out to be more than a little difficult to follow through.

It was impossible.

The first few squares on the board cost the king one grain, then two, then four…

By the end of the first row, he was up to 128 grains, which meant nothing to him.

In the second row, things got out of hand as the last square would get 32,768 grains. By the 21st square, he owed over a million grains, and by the 41st, it was over a trillion grains of rice, which was more than he, his subjects or any king anywhere has.

The artist eased the king's worries by suggesting, "Dear king, don't worry about the rice if you don't have enough of it. You can pay me the value of the missing rice in gold or land." Right then, the king realised he'd been tricked.

This was hard for him to accept. He was, after all, a king, and he knew a thing or two about negotiating.

After a moment of being quiet and thinking it over, he said to the man, "I will pay you in gold and land as you said for the total amount as my subjects need rice to eat.

But before you receive your payment, just to be sure you are getting what you asked for, I'd like you to count each and every grain of rice that I have to pay you."

"Oh, that won't be necessary, my king, I trust you," said the artist.

"Oh, on the contrary, my dear guest, it is very necessary," replied the king. "I wouldn't want to cheat you. There has to be no doubt that your king pays his debt." The artist started to think it over.

It takes one second to count a grain of rice.

To count the number of grains he'd been promised, it would have taken him his whole life and still, he would only be at the start of his count.

The king insisted on the count, and he wouldn't pay until the count was done.

The artist quickly realised the count was impossible and told the king to consider the chessboard as a gift instead.

Slow and Steady

Think about one of your goals. What kind of skills do you need to achieve it?

I'm sure you would pay a lot of money to get that skill, but this is usually something that money cant buy.

You have to pay with your time and persistence.

Do you think you can get 1% better at the skill every week?

If you do not skip a week and stay consistent in less than three years, you will be more than 200% better or twice as proficient.

If you continue with discipline, without skipping a single week for five years, you will be more than 10x as good.

Note: This only applies if you never fail to miss a week.

The two most powerful warriors are patience and time. - Leo Tolstoy

Sources
The Compound Effect - Darren Hardy
Rice Story - Purpose Focus Commitment
Psychology Of Money - Collaborative Fund