Compounding: The Eighth Natural Wonder

70 million years ago, a group of North American tectonic plates began to shift slowly. This movement produced tremendous pressure that lifted an entire region to almost 7,000 feet above sea level.

For millions of years, not much happened until a small stream began to develop along the surface of the rock. Occasionally there would be a flood, and the stream would fill with more water and other objects like rocks.  These stones would serve as little chisels pecking away at the supporting rock below as the current carried them along.

But every day, the stream grew bigger and burrowed a little deeper. Eventually, it was no longer a stream but what we now know as the Colorado River. Over millions of years, It carved one of the world’s seven natural wonders: The Grand Canyon.

Once you have experienced the canyon’s awe-inspiring scale, it seems inconceivable that it was once an unremarkable little stream. What makes this landmark unique and rare is how a focused action repeatedly happened for millions of years in a row. It is a quintessential example of compounding.

What is Compounding?

Compounding is when things grow in an exponential instead of linear pattern. Albert Einstein is undoubtedly one of the greatest thinkers the world has produced over the last few centuries. His theory of relativity has become a cornerstone for our understanding of time and how the universe functions. He plumbed the deepest depths of thinking about time and space, but he was the most amazed by compounding. Einstein’s fascination with the concept led him to observe: 

“Compound interest is the eighth natural wonder of the world and the most powerful thing I have ever encountered.”

Compounding can have a profound impact on our relationships, career, abilities, finances, and health. When harnessed, it has the power to improve our quality of life dramatically. It is as elusive, however, as it is powerful. As Charlie Munger put it:

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

Capturing the benefits of compounding starts with examining its core ingredients: action, focus, and time.

Action

We first learn about compounding as a principle for saving and growing our money. When I was in grade school, I discovered that when I put my money in the bank, it gains interest over time, and the total begins to grow exponentially.

I initially thought of compounding as a passive process, but the opposite is true. The bank can only pay me interest if they are successfully loaning the money I have on deposit. If the bank stops generating new loans, it will not have the funds to pay my interest, and my deposits will not compound. Compounding requires action.

Every day we are faced with choices, and those choices manifest in our thoughts, words, and behaviors. Over time our life comes to be a cumulative result of these choices and actions. A fitting analogy is a garden.

Plants begin as a small seed that, over time, can grow into a large plant. Not every seed will successfully grow to maturity, but only a planted seed has the potential to grow. Our actions are the seeds that define where compounding growth is possible in our lives. They are the starting point.

In entrepreneurship, one of the most important concepts is having a “bias to action.” When you start a new company, it has no sales and no customers. If you did nothing, it would be an absolute certainty the business would fail. Successful entrepreneurs make their best guess at what would help get the company off the ground and get moving. It’s much better than the alternative of doing nothing. A bias towards action is helpful in most areas of our lives. If I want to become fluent in another language, it is impossible for that future to exist until I take the action of learning my first word. In The Paradox of Choice, psychologist Barry Schwartz points out something interesting about how we reflect on our actions:

“When asked about what they regret most in the last six months, people tend to identify actions that didn’t meet expectations. But when asked about what they regret most when they look back on their lives as a whole, people tend to identify failures to act.”

In the movie Gladiator the protagonist Maximus says:

“What we do here today will echo in eternity.”

The actions we choose today reverberate for the rest of our lives and chart the course of our future.

In 1492, Christopher Columbus made landfall in China after an epic journey across the Atlantic Ocean. At least he thought he landed in China. During his preparation for the trip, Columbus made three significant mathematical errors while charting the course. The common thread was that they all resulted from overly optimistic assumptions on Columbus’s part. As biographer Samuel Morison noted:

“Of course, Columbus’s calculation is not logical, but Columbus’s mind was not logical. He knew he could make it, and the figures had to fit.”

I have seen the same tendency in my own life. As an optimist, I can assume that the future will be great and be overly generous in assessing my actions today. The inverse can also be true. Pessimism can discourage us from taking the steps needed to make our desired future possible. To harness the power of compounding, we have to take deliberate action today.

Focus

We all have areas of our lives that we would like to see change. Every year, over 50% of Americans will make a New Year’s resolution to change an aspect of their lives. Unfortunately, only around 8% of these resolutions stick for more than a few months.

At the beginning of 2020, I resolved not to drink any caffeine. The first couple of months went great, but by March, I was back to drinking a couple of Coke Zeros per day. Anyone who has been to the gym in January has witnessed something similar. We are generally successful in taking initial steps towards change. Our problem is that we often lack the focus to sustain these actions.

Focus is the ability to concentrate our attention. It has always been an important skill, but I believe it has become even more critical in recent years. As a result of technological innovation, the world has witnessed an explosion of options, and one example is in TV shows.  

A few decades ago, a handful of scripted TV show options existed. Then came cable and, more recently, streaming video. By 2009 there were 210 different scripted TV shows. By 2019 there were 532! There are more options to choose from than ever before, but It is becoming harder for a program to grab our attention. Once we choose a show to watch, if it suffers from a stretch of two or three mediocre episodes, we will quickly switch to one of the dozens of alternatives.

The more options we have, the more difficult it is to focus. Even if the show we are watching is outstanding, it is easy to imagine that one of the shows we aren’t watching would be even more enjoyable. Options seem to be freeing, but the reality is that they are often enslaving as they harm our ability to focus. Steve Job once remarked:

“Focusing is about saying no.”

We will meet thousands of people throughout our lifetime. Still, meaningful friendships with real depth and intimacy require that we focus most of our attention on a handful of people. The more that we focus our attention and efforts, the more profound the results will be.

If you stand outside on a day when the sun is shining, you can get warm from the energy that the light contains. A magnifying glass can focus light into a smaller beam that produces enough power to start a fire. However, if you focus light enough, it creates a laser that can cut through metal. The difference is the amount of focus. Focus is the discipline to say “no” to most of life’s options so that we can concentrate our time, actions, and passion on the few things that we value the most.

Time

Alignment of our actions and focus creates powerful results, and when this goes on for an extended period, something extraordinary happens. Warren Buffet is one of the world’s wealthiest people with an estimated net worth of $87.1 billion. Buffet began investing when he was 10 years old, and it has been one of the central focal points of his life for over 75 years. Remarkably, 99.7% of his wealth accrued after his 65th birthday.

It is counter-intuitive because exponential things don’t make intuitive sense to us. We tend to think about things in more of a linear progression. Not surprisingly, Buffet’s says this about his long term perspective on owning stocks:

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

It makes perfect sense. Once you are fortunate enough to be a part of something compounding, the most important thing is not to disrupt the process. It all begs the question, “What can we do to put time on our side?”

Throughout our lives, there will be many things that draw our focus. Some will be fleeting, others will last for a season, and a few will be focal points for most of our lives. The ones that persist will be the result of deliberate commitment. Our emotions and our passions will wax and wane over the many decades of life. For something to be a consistent focus, we must intentionally choose it. Commitment helps us to stands firm when our emotions and passions fluctuate.

A great analogy is a marriage. Two people commit to a relationship with one another “until death do us part.” They enter this commitment without knowing what circumstances the future will bring. There is an old Puritan proverb about marriage that says:

“First you choose your love, then you love your choice.”

We choose the things we give our focus and actions towards, and then we commit to love those choices. Only then do we begin to recognize the fantastic compounding that comes with time.

The final piece of ensuring that time works in our favor is sustainability. In 1982, the Southern Methodist University football team finished undefeated and ranked second in the country. The team had a remarkable rise to power for a school of only 6,000 students that lacked the pedigree of its conference rivals Texas, Texas A&M, and Arkansas.

A turning point in program history had happened when future NFL Hall of Fame running back Eric Dickerson unexpectedly chose SMU in 1979. Dickerson became the focal point of the “pony express” offense that catapulted SMU to the college football world’s pinnacle.

Soon rumors would begin to swell about SMU paying players. One of the most common quips was that Dickerson had taken a pay cut when he went to the NFL. In 1985, the NCAA handed down stiff penalties when a former player testified that as a recruit, he had accepted $5,000 to choose SMU. The NCAA didn’t know that many players at SMU had not only received money as recruits but were continuing to receive secret payments funneled to them via boosters.

Instead of stopping the payments, SMU alumni decided to slowly “phase-out” the distributions hoping that the NCAA would never discover their existence. In 1987, these payments came to light, and the NCAA responded by giving SMU the harshest punishment possible: the death penalty. It would be two years before SMU would be allowed to play another football game, and the school would manage only one winning season in the next twenty two years.

Compounding requires sustainable behavior. When we cut corners like SMU, time starts to work against us. It becomes a countdown until implosion. Over the course of my life I have witnessed people experience short term success with unethical behavior, but that success usually evaporated over time. Sustainability comes from pursuing our goals with integrity, empathy, honesty, and humility. We should listen most attentively to those leaders that have achieved sustained long term success.

Take action today to plant the seeds of compounding in your life. Intentionally and deliberately ignore 99.9% of options to focus your time and effort on the 0.1% that matters. Do it with commitment and integrity so it can last for decades.

Questions for Reflection

What is a dream that requires you to plant seeds with your actions today? What is preventing you from taking the first step today?

Write out the five things you want to focus on the most in your life and rank them. How does this list compare to how you are allocating your time, thoughts, and finances?

What is one thing about your behavior in the last year that could make growth unsustainable? What can you do to make a change in this area?