Compounding
Making Gains On Gains With Exponential Growth
Compounding is the process whereby a gain made on an invested resource is reinvested alongside the original resource, and further gains are made on that gain.
Exponential rather than Linear Growth
The gains increase dramatically as this process is repeated over many years. This is because the overall rate of rate growth is based on the combined resource and reinvested gains thus the growth rate is exponential or additive.
This compares with linear growth where the gain is taken and used or spent and the underlying resource does not grow.
The 2 Elements To Compounding
There are 2 elements for compounding to work:
- The gains must be reinvested
- Sufficient time should be allowed for the exponential growth to take place. Typically over decades or longer.
Compounding is commonly thought of in relation to financial investments where compound interest is earned when the interest earned previously is reinvested, rather than paid out in cash [as would be the case with simple interest]. As a result, in the following period, interest is earned on the principal plus the previously accumulated interest.
This is the financial example of exponential growth.
An Example Of Financial Compounding
David R. Phillips writing in Data Driven Investor give us the following illustration:
"In or around 1626, Peter Minuit bought the island of Manhattan from Native Americans for $24 (or roughly $1,000 in 2020 money) worth of trinkets, in a trade that is often considered to be the best investment ever made.
Let us imagine that sufficient investment opportunities existed in 1626 such that you could earn 6% interest and reinvest that 6% interest, to earn more 6% on it again next year. In that case, our $24 would now be worth $224 billion. This is compound interest at work.
If instead, we took the $1.44 we earned in interest in year 1 instead of reinvesting it, just kept it in cash, after the same 394 years worth of interest, we’d have only $591 in total. This is simple interest at work."
As Albert Einstein is alleged to have said:
Compounding - How Small Improvements Accumulate Into Massive Changes
Money is not the only thing that compounds; knowledge, ideas, skill and relationships do as well.
Compounding Through Habits
In his book, Atomic Habits, James Clear explains:
"Here’s how the math works out: if you can get 1 percent better each day for one year, you’ll end up thirty-seven times better by the time you’re done. Conversely, if you get 1 percent worse each day for one year, you’ll decline nearly down to zero. What starts as a small win or a minor setback accumulates into something much more. Habits are the compound interest of self-improvement."
Every choice you make in daily life has a cumulative effect. Any one decision in daily living won’t make much difference, the consistent and persistent repetitions of the same decisions over months, and years will be subject to compounding and will bring huge results.
For example: Going to the gym a few times won’t much difference to you, but regular use the gym several times a week over a year will have a noticeable and significant effect on your health and fitness.
Here is a current example in April 2021. I was messaging a
friend of mine yesterday, and she told me how she has put on weight
over the past year, through the coronavirus lockdowns. She told me how
she shocked she was when she went to her closet and tried on some of her
"going out" clothes and nothing fitted her. She told me that her body
weight has increased by 25% over the past 12-18 months! Clearly this was
not the result of one big meal, but the cumulative and compounding
effect of eating a little bit too much a little bit too often.
In The Power Of Habits we noted how habits are efficient and enable us to perform thought processes and behaviours without wasting time and energy figuring out what to do, and they do not require your conscious attention.
The compounding power of habits is that firstly they are regular and automatic [and thus persistent and consistent]; and secondly that they can: sustain you, maintain you, or undermine you.
If you were to acquire and practise some of the "Productive Thinking" skills listed in the Resources section of the Mental Models article on this site you would benefit from greatly enhanced productivity and all the personal and professional benefits that would accrue to you as a result of that.
Compounding The Benefits of Renewing Your Mind
Renewing Your Mind is all about learning how to use your mind in resourceful ways that are truly transformative.
- This takes work and effort. The human mind runs on deeply ingrained and habitual patterns of thought.
- Neural pathways in your brain get stronger with repetition and you will be training your brain to establish new pathways through new activities, new patterns of thought, and new behaviour.
- Renewing your mind is based on practices, not beliefs, and with persistent and consistent application they will have a profound and positive effect on your life.
If you review the 15 qualities that are outlined in this article you will experience a compounding effect that has the potential to transform your perception and experience of life.
Compounding The Benefits of Learning How To Think and How To Stop Thinking
The theme of this site is how to think effectively and in order to be able to do that you need to learn how to stop thinking. The specific focus of this site is to show you how to do this so that you can cope in tough times.
- This is all about learning how to think not what to think, and knowing how to apply the most appropriate cognitive processes to the task in hand.
- To really learn how to think effectively we have to learn and master the art of not thinking. A quiet mind is an insightful mind and a resourceful mind.
- The whole point of all this is to empower you because the outcomes that you experience are determined by your responses to the events in your life.
- The human capacity for self-deception and miss-perception should never be underestimated. A working knowledge of the main cognitive biases is a prerequisite to applying thinking skills.
- We build our personal perspective of "big picture" truth on a raft of partial truths and insights which come from our latticework of mental models.
The compounding benefits of persistently and consistently applying these skills will have a huge effect on your life. The details of each are spelt out in the articles linked above. The cumulative and compounding effect could be inestimable.
Return from "Compounding" to: Mental Models
- What if everything we think…
LATEST ARTICLES
The Balanced Brain - The Ultimate Route To Personal Transformation
How To Experience The Benefits Of A Balanced Brain. Underpinning all of the belief systems and practices that offer routes to personal change, transformation and spiritual growth is the balanced brain…How To Make Better Decisions - By Avoiding The Narrative Trap
To Understand The Truth We Have To See The Whole Picture. One of the best ways to make better decisions is to have a deeper understanding of the many things that might stop that happening. To understa…The Greatest Love - The Most Important Relationship You Will Ever Have
Yet Most Will Never Know It Everyone of us has a place, in our hearts there's a space, that is home to the greatest love of all. This love transcends everything we think we know about the world of for…Everything Is Connected And Why You Don't Feel It
...And Why It Matters
As human beings we are skating on very thin ice with our sense of self and certainty about "how things are" and what we like to think of as reality:
Who Is In Charge Of Your Brain?
How Not To Be Stupid. Who is in charge of your brain? This is not a silly questions. It matters because the outcomes that you experience in your life are determined by how you respond to the events th…How To Be A Winner On A Very Large Scale
The Incredible Benefits Of Selective Attention. This is not a typical article about how to be a winner. We are not going to talk about goal setting, the importance of habits, the power of focus and al…The Metagame Approach To Life
How To Achieve Your Biggest Objectives.
The metagame approach to life is all about winning and achieving your biggest objectives by:
- Understanding the bigger picture
- Being better by doing things d…Shantideva - The Way Of The Bodhisattva
Walking The Path Of Compassion. Shantideva the 8th century Indian Buddhist sage is famous for his treatise "The Way of the Bodhisattva" delivered as an extended teaching to the monks of Nalanda monast…Reframing History - Deconstruction And Discussion Not Destruction
History is always about context, not imposing our own moral values on the past. For those of us fortunate enough to live within western democracies, we are living in an age where a vociferous and into…Tao Te Ching - Connecting To Your True Source Of Power.
How To Be Lived By The Tao. The Tao Te Ching is one of those books that many people read, few understand, and even fewer put into practice. The only way to know the Tao is to experience it, and it is…How Things Really Are - The Inbuilt Design Flaws
Chaos, Disorder And Decay Is The Natural Order Of Things. Nobody has the perfect life. We all struggle and strive to attain health, wealth and personal happiness. Yet these three big areas: our health…Intuition Or Anxiety - Are There Angels Or Devils Crawling Here?
How To Tell The Difference Between Intuition and Anxiety. How do you know whether the voice of your intuition is real or just the product of your inner anxiety? Several months ago I was having a drink…What Is Truth - How To Tell A Partial Truth From The Whole Truth?
How the truth and nothing but the truth is often not the whole truth. My great aunty Flo broke her arm and died. It is true that she broke her arm in 1923. It is also true that she died in 1949. But t…Duality And Life Beyond Your Thinking Mind
Duality and life beyond your thinking mind focuses on the limitations of time, foreground and background, duality and "stuckness". The first aspect of duality and life beyond your thinking mind focuse…The Conscious Mind Is Limited - Be Aware And Be Prepared
Being aware is the first stage of being prepared. The conscious mind is limited in so many ways. There are some who would argue that there is no such thing as conscious thought and that it is represen…Your Inner Map Of Reality - Here's Why You Think The Way You Do
The big picture of how your inner map of reality creates your feelings, thoughts, and behaviours. Your inner map of reality is based on the filters of your own ethnic, national, social, family and rel…The Failure Of Cancel Culture - Suppression Not Engagement
Why we need to wear our beliefs lightly and develop negative capability. Throughout history people have campaigned to fight beliefs, ideologies, and injustices that they perceived to be oppressive, di…4 Big Reasons Why We Get Stuck In Our Attempts At Personal Change
Most People Spend Their Entire Life Imprisoned Within The Confines Of Their Own Thoughts. This first of the 4 big reasons why we get stuck is, in my view, the most important. The "self-help industry…How Do I Change And Why Is It So Hard?
We Would Rather Die Than Change, And We Usually Do In my experience, the vast majority of people who say they want to change don’t change. Most people reading this won’t change because they don’t real…The Illusion Of A Separate Self - Windows 11 With Self Awareness!
Beyond the content of your mind you are so much more than you think you are. When we talk of "myself" this is the conventional way of referring to our self image which is in fact the ego's constructio…Finite And Infinite Games - Dazed, Confused & Ultimately Transcendent
This is not an instruction manual, it is a wake up call!
Over this past week I have read Professor James Carse's highly regarded "Finite And Infinite Games - A Vision Of Life As Play And Possibility"…The Gap And The Gain - How Your Brain Sabotages Your Happiness
How Your Lizard Brain Sabotages Your Happiness We are hardwired to measure our progress in any and all areas of life where we have goals and aspirations. We can't not do it. But what we measure and ho…How To Wake Up - 4 Simple Practices To Help You Wake Up Now
So What Exactly Does It Mean to Wake Up - What Is "Enlightenment"? There is nothing magical, mystical or mysterious about waking up we’re actually having glimpses of enlightenment all the time. Enligh…Situational Communication - Different Strokes For Different Folks
Situational communication is about taking account of 3 often ignored factors about the other person. You are a situational communicator when you recognise that effective communication is not an event…How To Influence Without Authority - 6 Key Tips
The secret to how to influence without authority is that you get what you really want by giving other people what they really want. We live in an interconnected world and knowing how to influence with…Change Questions To Change Your Outcomes
Asking The Right Questions Is Critical For A Successful Change. Every time we initiate a significant change - whether in our personal life or in an organisation - we will most likely over-estimate our…Group Culture - The Invisible Software That Rules Your Life
Group culture is: "How we do things round here". We like to see ourselves as free agents making our own choices and living authentically but the reality is that The Matrix has many layers and we are u…Why Getting From A to B Is Not Aways A Straight Line
In circumstances of significant change, the progress from A to B will not be in a straight line. We run our lives largely on auto-pilot. In most circumstances your experience of getting from A to B is…The Art Of Persuasion Planning For Success - Here's How To Do It!
To be successful in the art of persuasion you must ensure that certain things happen. To be successful in the art of persuasion you must establish a framework of what has to happen to get you to that…The Art Of Persuasion Advanced Communication Skills - Gaining Buyin
Create The Environment Where They Want To Buyin to Your Proposal In order to build the win-win you have to uncover what it is that the other person really wants or needs, and to do that you have to as…