Rewiring You’re Paradigm for The Compounding Effect
The Human Mind tends to embrace linear thinking rather than exponential thinking.
Ask a person the rate of return they will get from a stock at 15% return every year and they will probably answer 150%.
However, they do not consider the compound effect that takes place.
The actual return is 300% plus.
This is just an illustration of our thinking patterns which tend to directly affect the decisions we make in every aspect of our life.
Therefore, being in alignment with the natural forces of the compounding effect can clearly add value to you’re life.
Let’s start with investment where the compounding effect is mostly observed & practiced.
The best investor to look at when talking about compounding is Warren Buffettt.
He improved upon Benjamin Graham’s investment strategy.
Graham would buy undervalued company’s usually those worth a dollar for 50 cents. Then over a short period of say, say 2 years, if they crossed 50% he would sell.
The drawback Buffett saw here was that not all of those undervalued companies increased in value. Thus, undermining the profits.
Yet, Buffett, who also worked for Graham’s firm as an analyst, saw that the price of some great scripts kept on increasing in value well after it had crossed 50% of its value.
This gave light to Warren’s own investment strategy that has made him consistently one of the richest people in the world.
He found companies with a durable competitive advantage, the economics of which were like a monopoly limiting such companies chances of ever going bankrupt. This gave them the advantage over competitors allowing them to charge higher prices or sell more of their product. Think Coca Cola and Apple.
Rather than having to wait for bargains, Warren could buy these companies at a fair price so long as he held these companies for the long term.
This has helped him to earn through the power of compounding without having to pay capital gains either, a big expense saved.
Over a 35 year period, he was able to turn an investment of $11 million in Washington Post to $1.4 billion.
The strategy is simple, find superstar companies, invest in them at a fair price, & HODL, preferably forever.
That is when the compounding effect takes place.
If we look at the superstar companies that Warren Buffett talks about, what they have is consistency in their actions.
The compounding effect can be seen in successful companies as well.
Look at Amazon.
When Jeff Bezos started his company and onboarded investors, he made it very, very clear that Amazon is all about the long-term.
They would not issue any dividends but rather continuously invest the retained earnings to reach the objectives of the organization.
This has been among the key philosophies of Amazon because of which they have been able to have such exponential growth over time at Amazon today becoming a trillion-dollar company.
Executives have to also fully focus on the long-term because if we are to look at the majority of the revenues generated by a company it is in their later years when the exponential growth function has hit its full mark.
The concept of the compounding effect can be applied for individual growth as well.
Opportunities tend to multiply as they are seized.
Whenever you are saying No to an opportunity, remember that you are also saying No to two more opportunities that could have come after it.
The man who seizes the right opportunities and continues seizing more of them will have not achieved twice as someone else but 10x more.
The key is simple, consistently focus on the right opportunities & see you’re growth with the exponential, compounding effect.