Investing

You can't stop

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ompounding is mind-bending.  

Fold a piece of paper in half 23 times and you will create the tallest building in the world.

Crazy. But true.

Start with a standard, blank piece of paper, 0.1 millimetre thick.

Fold it once, 0.2mm. Twice, 0.4mm. Three times and the thing in your hands is 0.8mm thick.

Four more folds. 12.8 millimetres thick.

Four more and it's 205 millimetres tall.

Things get wild in hurry.

That’s the first thing to note about compounding – it accelerates over time. While you keep doing the same thing, like folding a piece of paper in half, the effects of your actions begin to multiply.

Your first fold added 0.1mm to your tower. Your twelfth fold adds 205mm. Same input, it just has 205 times more power now...

Twelve steps in and it feels like we've made a lot of progress.

We have.

And we haven't.

Based on where we started, we've come a long way. Based on where we want to go, we're still close to a kilometer away. Our tower isn't even half-a-metre tall and our progress rounds to zero.

That's the second important thing about compounding.

It tends to look pointless early on so most people give up on it before it has a chance to work its magic. Because it's counter-intuitive, when people don't see the gap between their current situation and their dreams narrow quickly, they stop doing the only thing that compounding needs: carrying on.

Compounding is free in the traditional sense of the word but it takes its fee in the currency of patience.

In the real world that manifests a bit like this. Imagine if this example had one rule: that you could only fold your piece of paper once every year. Think how many people would lose interest or faith, or even their piece of paper in the first twelve years when their actions looked like a waste of time. 

Sprinkle onto that the social trappings of life - the jealousy of seeing other people around you succeed, or the embarrassment of explaining what you've been up to for a decade - and it's easy to see why few people stay the compounding course.

Source: Visualize Value

The most important thing about compounding, then, is not what you do, it's how long you're prepared to do it for. It has this magical property where no matter what you start with, and how little* you improve, as long as you're consistent in your progress you will achieve amazing things. You just can't stop.

You never know how close you are to something you never thought you could do.

Notes

*Developed stock markets are the best example of this I know:

In the last fifty years (4/4/71 to 4/4/21), the US stock market - as measured by the S&P 500 - has nudged forward at a rate of 0.04% a day, on average. In other words, day-by-day, it barely went anywhere. But because it was relentless in delivering this tiny improvement over fifty years, it compounded into a total return of 3946% - i.e. it would have multiplied whatever you invested into it by 40.

April 2, 2021
by 
Dom
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