Here are some famous quotes on compounding:
Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t … pays it.
Albert Einstein
Understanding both the power of compound interests and difficulty of getting it is the heart and soul of understanding a lot of things.
Charlie Munger
My wealth has come from a combination of living in America, some lucky genes and compound interest.
Warren Buffett
Everyone knows compounding returns and the inexperienced would think of investing as simple — just press a few buttons, buy and hold and “ta-da!”, the returns will compound. It looks and sounds simple but it is not.
Paradox of Effort
The Paradox of Effort plays tricks on us. Delivering exceptional, effortless performances is achieved only through consistent compounding of small daily actions. We have to work and work to get our flywheels spinning fast and efficiently such that they generate incredible incremental speed from a tiny unit of incremental effort. At this level, our output per unit of input simply builds upon itself. Hence, we can see how top-class artists, performers, sportsmen and sportswoman looks so effortless and elegant in their performances and achieve success.
Survivorship bias
Survivorship bias refers to the tendency to focus on the successes of individuals or groups while overlooking their failures. This will lead to an inaccurate assessment that it is easier to succeed.
An example of survivorship bias: A study of successful entrepreneurs might only look at those who have founded successful businesses. Many will boast about their success and less about their challenges and failures. Many are also fascinated by success stories than failures. Also, many entrepreneurs have failed. Success looks easy. Behind each “overnight” success are years of hard work.
Dunning-Kruger effect
The Dunning-Kruger effect results in people who are new and inexperienced to the task overestimating their ability.
They are dangerous biases that distort reality believing that success is easier than reality. When we ourselves are faced with challenges and failures, we may self-doubt our capabilities. Am I so bad and lousy?
In the book, Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life by William Green, he wrote a chapter (Chapter Seven) on great investors adopting high-performance habits whose benefits compound over time to achieve amazing compounding returns.
Aggregation of marginal gains: Getting better each day
The phrase was the theme of Chapter Seven in “Richer, Wiser, Happier”. It was coined by a legendary performance coach, Sir David Brailsford who turned the British cycling team into an unstoppable force in Beijing and London Olympics. At the 2008 Beijing Olympics, his squad won seven out of 10 gold medals available in track cycling, and they matched the achievement at the London Olympics four years later. Before that, British cycling had only won a single gold medal in its 76-year history. Those triumphs not stemmed from one major innovation but a multitude of minor improvements which combined to create a crushing advantage. Below is an extract of his interview with Harvard Business Review.
HBR: Can you share some examples of your marginal gains approach?
Sir Dave: To give you a bit of background, when we first started out, the top of the Olympic podium seemed like a very long way away. Aiming for gold was too daunting. As an MBA, I had become fascinated with Kaizen and other process-improvement techniques. It struck me that we should think small, not big, and adopt a philosophy of continuous improvement through the aggregation of marginal gains. Forget about perfection; focus on progression, and compound the improvements.
By experimenting in a wind tunnel, we searched for small improvements to aerodynamics. By analyzing the mechanics area in the team truck, we discovered that dust was accumulating on the floor, undermining bike maintenance. So we painted the floor white, in order to spot any impurities. We hired a surgeon to teach our athletes about proper hand-washing so as to avoid illnesses during competition (we also decided not to shake any hands during the Olympics). We were precise about food preparation. We brought our own mattresses and pillows so our athletes could sleep in the same posture every night. We searched for small improvements everywhere and found countless opportunities. Taken together, we felt they gave us a competitive advantage.
Eben Harrell, How 1% Performance Improvements Led to Olympic Gold, October 30, 2015
Each improvement does not look earth-shattering in isolation. It is the aggregation of marginal gains that is so powerful. Moreover, the modest benefits generated by smart habits continue to compound over many years. They slowly add up and we need to have the discipline and focus to keep grinding.
In the short run, all these tiny, incremental improvements seem insignificant. But time is the enemy of bad habits and the friend of good habits. When you pound away year after year, decade after decade, the cumulative effect is stunning. This will set you apart: the king of constancy.
The good news, then, is that we do not need a secret sauce or a stratospheric IQ.
What we need is a selection of sensible habits that are directionally correct and sustainable that daily “tiny gains” become a tremendous long-term advantage. They seem to grow in a continuous, compounding manner as they keep learning and keep improving themselves.
The book went on with many snippets of how great investors stayed on top of their game: continuous learning machine, outworked and out-think to stay ahead — Peter Lynch’s advice to Bill Miller that in the investment business, there are two gears: overdrive and stop.
The aggregation of marginal gains applies to every aspect of our lives (for the good or bad).
Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.
James Clear, Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones
If you want the secret to great success, it’s just to make each day a little bit better than day before. There are different ways you can go about doing that, but that’s the story — Just making progress over and over again is the critical part.
Tom Gayner, CEO, Markel Group
The magic of continuous improvements
The tremendous efforts (that people don’t see)
Picasso and drawings
Picasso was walking though the market one day when a woman spotted him. She stopped the artist, pulled out a piece of paper and said, “Mr. Picasso, I am a fan of your work. Please, could you do a little drawing for me?”
Picasso smiled and quickly drew a small, but beautiful piece of art on the paper. Then, he handed the paper back to her saying, “That will be one million dollars.”
“But Mr. Picasso,” the woman said. “It only took you thirty seconds to draw this little masterpiece.”
“My good woman,” Picasso said, “It took me thirty years to draw that masterpiece in thirty seconds.”
Warren Buffett and investing
In 1993, Warren Buffett sat down for an interview with Supermoney author Adam Smith, and the conversation began like this:
Smith: “If a younger Warren Buffett were coming into the investment field today, what areas would you tell him to point himself in?”
Buffett: “Well, if he were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.”
Smith: “But there’s 27,000 public companies.”
Buffett: “Well, start with the A’s.”
Acting
“There are a whole bunch of roles where people say, ‘Oh, you’re playing yourself.’ I guess it’s kind of a compliment. Or people say, ‘Oh, man, you just roll out of bed and do that.’ The work is to make it look effortless. That’s the hard part.”
Matthew McConaughey
If it wasn’t hard, everyone would do it. It’s hard that makes it great.
Tom Hanks
10,000-hour rule
“Practice isn’t the thing you do once you’re good. It’s the thing you do that makes you good.”
Malcolm Gladwell, Outliers: The Story of Success
In the book, “Outliers: The Story of Success” by Malcolm Gladwell, he explains the “10,000-Hour Rule”. It was based on a study by Anders Ericsson. Gladwell claimed that greatness requires an enormous time investment in practice, and he provides several examples, including the Beatles, Bill Gates, and others. Gladwell explains that achieving the 10,000-Hour Rule is the key to success in any field, and is simply a matter of practising a specific task for a long time. The 10,000-Hour Rule can be accomplished with 20 hours of work a week for ten years. He explains how it helped the Beatles become world-famous musicians by having the opportunity to perform live as a group in Hamburg, Germany over 1,200 times between 1960 and 1964. Although they initially started at strip clubs, they accumulated more than 10,000 hours by playing nonstop.
It takes lots of effort to succeed and achieve excellence.
Not a straightforward journey
The journey is not straightforward. It is not a simple linear relationship between efforts and excellence. While we learn to equip ourselves with the skills, the road to excellence is fraught with challenges, setbacks and failures. As we put more effort along the journey, we will encounter more setbacks and failures. There will be lots of turns and possibly, some u-turns and stoppages. At times, we felt lost and self-doubt that we question whether we are doing it “right” and whether the pursuit is worth the effort.
Often, after little or no results, we may want to give up early. The correlation between efforts and results may vary between people. It may be easier and faster for some but a long winding journey for others and some may not succeed.
It’s ok to fail. Failing does not shape your personality; it’s how you react upon your failure. Do you dust yourself off and mope or do you dust yourself off and come back stronger the next time? Eventually you will win. It may not happen the next time, it may take a little time but you will win in the end.
Tiger Woods
Add, subtract — Reflect, change, evolve and pivot
Before I studied the art, a punch to me was just like a punch, a kick just like a kick. After I learned the art, a punch was no longer a punch, a kick no longer a kick. Now that I’ve understood the art, a punch is just like a punch, a kick just like a kick. The height of cultivation is really nothing special. It is merely simplicity; the ability to express the utmost with the minimum.
Bruce Lee
Bruce Lee said it well. When he first started learning, he saw punches and kicks as just physical movements. He didn’t understand the underlying principles or how to use them effectively. As he continued to train, he began to see punches and kicks in a new light. He understood how they could be used to generate power, control an opponent, and defend himself. However, after he had mastered the art, he came to realize that punches and kicks were simply tools. They were not inherently special or powerful. What mattered was how he used them.
The same is true for any skill. When we first start learning something, it can seem complex and overwhelming. We may not understand how to use the tools or techniques effectively. However, as we continue to practice, we begin to develop a deeper understanding of the skill. We learn how to use the tools and techniques in a way that is both effective and efficient.
The more I learn, the more I realize how much I don’t know.” –
Albert Einstein
The wisdom paradox – the more you learn, the more you are exposed to the immense unknown. It will happen as we dig deep to build our competence. This should be empowering, not frightening.
The art of subtraction
A habit observed in Richer, Wiser, Happier that great investors have in common:
They focus almost exclusively on what they are best at and what matters most to them. Their success derives from their fierce insistence on concentrating deeply in a relatively narrow area while disregarding countless distractions that interfere with their pursuit of excellence.
Taoist philosopher Lao-tzu wrote that the path to wisdom involves “substracting” all unnecessary activities.
The art of subtraction is incalculably important particularly in an age of information overload when our minds can be so easily scattered.
Growth mindset; don’t stagnate
In a growth mindset, people believe that their most basic abilities can be developed through dedication and hard work—brains and talent are just the starting point. This view creates a love of learning and a resilience that is essential for great accomplishment.
Carol Dweck
Having a growth mindset means believing that a person’s abilities are not innate but can be improved through effort, learning, and persistence. A growth mindset is about the attitude with which a person faces challenges, how they process failures, and how they adapt and evolve as a result. The ability to learn and grow after a setback is one of the keys to success.
People with a growth mindset are always looking for ways to improve, whether that means learning new skills, trying out new strategies, or making big changes to how they work. When they encounter a setback, a person with a growth mindset can recover more quickly and might view unanticipated problems not as barriers to progress but as opportunities for growth.
It is possible.
Don’t stagnate. Don’t stop improving. We will not know when the operating environment and competition turn against us.
Keep improving. Warren Buffett is an excellent example of a growth mindset.
How Warren Buffett keeps evolving and adapting to achieve great returns
Paul Lountziz, the President of Lountziz Asset Management cited Buffett as a perfect example of the degree to which you can improve yourself over the years. He has attended Berkshire’s annual meeting for three decades and is awed by Buffett’s ability to keep evolving. He started out by investing in cheap stocks, then embraced better businesses, then bought whole companies, then ventured into foreign markets such as China and Israel, and then invested in two industries he had famously avoided: railroads and technology. That evolution enabled Buffett to make the most lucrative stock pick of his career in his late eighties — an investment in Apple Inc. that has so far earned a profit of more than $80 billion. He has kept true to his discipline and principles but he has adapted them to the particular economic and investing environment at the time. It is unbelievable. Very few people can do that.
Yes, in our journey to develop our skills, we look for the right tools and the holy grails. We may go through different approaches. We will learn and add many insights and perspectives, then, we need to recalibrate (add and subtract) our habits. We learn, change, fail, stop, adapt, and pivot on our path to excellence. It is not straightforward.
The road to excellence is always under construction.
There is no end to the journey of becoming excellent. No matter how good you are at something, there is always room for improvement. This is because the world is constantly changing and evolving, and what is considered excellent today may not be tomorrow. As a result, we need to be constantly learning and growing to stay ahead of the curve.
The saying also reminds us that the journey to excellence is not always easy. There will be times when we feel discouraged or like we are not making any progress. However, it is important to remember that everyone experiences setbacks along the way. The key is not to give up and to keep striving for excellence.
When effort is the reward
We have to enjoy the effort (the journey) rather than just focus on the outcome. Focusing on the effort as the reward and enjoyment will motivate us to keep going, keep improving and keep working hard. Outcomes come infrequently and may not be within our control. Control the effort, and dedication to give 100% of yourself to the task at hand; always be prepared for the opportunities to come and shine. We should enjoy the process and it should give us satisfaction.
- To be successful and fulfilled, we need to decide what we care about most and be honest with ourselves about what we do best.
- We need to adopt daily habits that enable us to improve continuously where it truly counts and to subtract habits that divert us. What are the beneficial habits that should be part o our daily routine? What is the Do Not Do list that we habitually distract or undermine ourselves? The key is not about pushing for perfection but committing to sustainable and directionally correct habits. Sustained excellence requires us to subtract and go deep.
- A growth mindset to keep improving our craft despite challenges and failures and how we keep adapting and evolving.
- Have your own inner scoreboard. There is no need to compare. Everyone is different and every journey is different.
- Get to know people who are pursuing similar skill sets and have done well. Learn from them. Get to know how they did it, what are their challenges, how they overcome them, and what are they doing and thinking in similar situations. Great if they can mentor and guide us in our journey; you can also observe some through their social media updates.
- Learn about the stories of successful people and their journey to success. There are many great biographies and documentaries about their journeys to success. They are very worth reading/watching to get a more balanced perspective of them. They did not have it easy; they struggled a lot more and failed more. Some worth reading/watching include Steve Jobs, Warren Buffett, Charlie Munger, Elon Musk, Keanu Reeves
Other useful posts:
Embracing the finiteness of life and what remains
Here’s why the best investing opportunities are not obvious
1 Comment
Comments are closed.