Use the Compound Effect to Grow Your Rate of Growth – The Power of Compound Effect
Nearly every schoolchild will remember learning the terms simple interest and compound interest as mathematical concepts. Most of us think of interest as a financial term used by investors and bankers. All of us know that compound interest is interest that is paid on interest. When the concept of compounding is applied to daily life it has an effect that is nothing short of astounding.
The Compound Effect is that miraculous phenomenon that grows your rate of growth itself.
The story of the chess player and the king is probably the most striking example of the Compound Effect. It is said that the man who invented chess presented an Indian king with a chessboard. Pleased, the king told the man that he could could ask for anything in return. The man thought a while and then came up with what sounded like a simple request.
“Your majesty,” he said, “I wish that grains of rice be placed in each square of this chessboard, starting with one grain in the first square. Each square should have twice the number of grains as the one before.”
The king, impressed by what he thought was an almost foolishly modest wish, granted it. They watched with amusement as the grains added up. 1, 2, 4, 8, 16, 32, 64. But by the 18th square, the number of grains had already reached 65,536 — 1 kilo of rice contains about 55,000 grains. From here it the kilos doubled, not the grains. The 55th square contained as much rice as the entire planet grows in one year.
The last square contained as much rice as the earth would grow in 349 years!
In a version of this story, the King, realized that he was being bamboozled by the Compound Effect, told the chess player, “I will give you the rice you ask, but in order to make sure you don’t feel cheated, you must count every grain first. When you have counted them all, the rice will be yours.”
It would have taken trillions of years to count that much rice.
Compounding: The 8th wonder of the world
Albert Einstein considered compound interest the most powerful force in the universe, calling it the eighth wonder of the world. “He who understands it, earns it. He who doesn’t, pays it,” he said. The world’s beloved billionaire Warren Buffett had an instinctive understanding of compounding. “My wealth has come from living in America, some lucky family genes, and compound interest,” he says.
The young man who started with 5,000$ at age 14 used the slow and steady power of compound interest to grow his wealth to 1 million dollars by age age 30 — to 84 billion dollars at the age of 88. Of course, he had innate skills and wisdom as well, but compound interest grew the rate which his money grew.
To illustrate the power of compounding, Buffett takes the example of King Francis I of France buying the Mona Lisa painting for 4,000 emus (roughly $20,000). Its value today is assessed at $830 million. Buffett astutely points out if King Francis I had instead invested 4,000s emus at annual compound interest of 6% after tax, its value today would be $1,000,000,000,000,000 — in plain English, about 1 quadrillion dollars.
Compound Interest in life
If perhaps you are wondering if such a clearly financial concept could possibly be applied our daily lives, here’s food for thought. The very body you call your own is the result of a biological process of compounded growth. When the male sperm and female ovum fuse together at the start of pregnancy, they produce a single cell. This starting cell grows exactly the same way the grains of rice accumulated on the chessboard. One cell becomes, two become four, four become eight, eight become 16 — and so on. In just nine months, this compounding process has produced one of nature’s most complex living forms, a human baby.
Your adult body has over 37.2 trillion cells. They are dying and being replenished at an amazing rate. Every seven years, all your cells will have been completely renewed. The total number of cells you will have over your life span is vastly greater.
Compounding can accelerate and grow your rate of success in different life areas. Let us look at how the Compound Effect can transform and accelerate your growth in Health, wealth and Relationships.
Take the single example of a person who decided to walk 1,000 steps every day. After a month, he doubles this to 2,000. No one notices any great change yet. He adds a 1,000 steps a month, till by the 10th month, he is doing a full 10,000. He feels fitter, has lost some weight, and enjoys a feeling of lightness. People are beginning to notice that he is visibly fitter.
But the compounding effect has been making other changes. He has found his appetite improving, and begun eating more protein and healthy fats. This has helped him feel stronger and more energetic, and he has found himself to increase his workout goals. He has added running to his daily practice and some weight. He is now looking trimmer, feels more competent, and become conscious of diet and hydration.
The compounding effect of simple walking has brought about a cascading series of changes that have led to mushrooming evolution in his health, mindset and habits. Each small habit strengthened the rest so that the whole effect was much greater than the sum of its individual parts.
Imagine if he were to add meditation to this set now. He starts with 10 minutes a day, slowly working up to 40 minutes. The increasing calmness he feels and newfound ability to focus on what is important improves his exercise outcomes, lowers his blood pressure, and starts bringing about deep metabolic changes which will lengthen his life span in the long run.
The story is told about the philanthrope Sylvia Bloom, who worked for 67 years for the law firm Clearly Gottlieb Steen & Hamilton as a secretary. During this time whenever her boss wanted to invest in some stocks, he’d send her. After buying the stocks he wanted, Sylvia she would buy some more of the same stock for herself from her own salary.
When she passed away at age 96, she donated $6.24 million to the non-profit organization Henry Street Settlement. By that time, it is said she was worth $9 million. Sylvia Bloom is another great example of someone who understood the Compound Effect, and used it well.
During her life she worked 67 years for Clearly Gottlieb Steen & Hamilton law firm as a secretary. During this time when her boss wanted to buy a stock, she would do so and buy the stock for her boss. Later, she would buy the same stock personally from her own salary. She passed away at 96 years and donated $6.24 million to the non-profit: Henry Street Settlement.
According to report that followed the surprise announcement of her charitable donation, she was like many others who did not live above their means and were completely unassuming in acquiring their wealth: Ronald Read, a former petrol station attendant and janitor who died in June 2014 with a fortune of US$8 million; Grace Groner, a secretary with an estate of US$7 million; and Ronald Murin, a lifelong librarian who had an estate worth US$4 million.
What do these “secret millionaires” have in common? How were they able to accumulate their wealth? What is their lesson for us?
Beki Mafulela, strategic markets specialist at Allan Gray, says, “Over time they consistently spent less money than they made, saved the difference, invested in good companies, and were patient.” He says that one of the commonest mistakes people make is not realising the power of simple methods, simple rules, and simple techniques — when they are linked together by the Compound Effect.
It has often been said that Warren Buffett’s amazing financial instincts come from his habit of compounding his knowledge. Alice Shroeder, author of his official biography, The Snowball, says of him: “He’s read everything that he could find about business. . . newspapers, biographies, trade press. . . He went to American Express, and he spent hours talking about that business. . . He has stacks of reports on his desk from the companies he owns, pig stalls, jewelry, boat winches, everything you can imagine. He reads hundreds of annual reports every year from companies that he doesn’t own yet, because he just wants to understand their businesses, and then when the opportunity arises, then he’s ready.”
If there’s one thing the Compound Effect teaches us, it is that very small actions and changes, when repeated over time, can lead to disproportionately giant outcomes. This applies equally to relationships — small actions have the power to build deep, enduring relationships just as much as the wrong actions repeated can destroy it. Dr Jonathan Ramachenderan writes, “Your first step should be to examine your relationship and ask: What one or two actions do we engage in everyday that demonstrates our love and respect for each other? Could it be the warm hug or glass of wine and drawn bath as you walk in the door from work? Is it a piping hot cup of tea in the morning? Or the foot and back rub at the end of the day? Or could it be the regular text messages through the day to show that you are thinking about each other?”
He says the habit of slowly learning your spouse’s “language of love” — the ways in which she expresses her love can deeply affect the success of a marriage. Dr Gary Chapman identifies five languages of love — Words of Affirmation; Physical touch; Giving and Receiving gifts; Quality Time; and Acts of Service. Some small compounding actions that could arise from these are —
— Send an unexpected note, text or card
— Encourage genuinely and often
— Hug, kiss, hold hands; show physical affection regularly
— Give thoughtful gifts and gestures
— Create special moments together
— Do chores together
— Alleviate each other’s workloads
Using the Compound Effect
How can you use the power of the Compound Effect in realizing your Vision, Mission and Goals? Darren Hardy, author of the best-selling book, The Compound Effect, warns that the outcomes of compounding emerge innocuously and slowly and by definition require patience. Hardy says, “Even though the results are massive, the steps, in the moment, don’t feel significant. Whether you are using this strategy for improving your health, relationships, finances or anything else, the changes are so subtle, they’re almost imperceptible.”
Remember the story of the tortoise and the hare? Whereas the hare ran too fast and got tired, the tortoise move steadily in small steps, and eventually won the race, even though it was the slower animal. Patience and the ability to stick with a slow pace of change, and not to expect instantaneous results are absolutely vital.
Your morning and evening routines are specially important: they are the “bookends” of your life. Hardy says, “to reach new goals and develop new habits, it’s necessary to create new routines to support your objectives” and create the foundation for the Compound Effect. Take inspiration from the morning routines of many superstars, as revealed in Hal Elrod’s The Miracle Morning —meditation, affirmations, exercise, meditation, reading, visualization, and journaling. Of course, your ‘bookends’ must be unique and relevant to your Vision, Mission and Goals.
An unexpected compounding effect on your life and relationships can emerge from simple gratitude. Hardy says, “It’s a small thing, but it can have a huge impact on your life, and the lives of the people around you. . . the ripples of it will spread throughout your life and beyond.”
The English poet Lady Mary Montgomerie Currie, under her pseudonym of Violet Fane, put it best in her poem —
All hoped-for things will come to you
Who have the strength to watch and wait,
Our longings spur the steeds of Fate,
This has been said by one who knew
Coder’s revolution http://wwvv.codersrevolution.com/blog/will-a-piece-of-paper-folded-42-times-reach-the-moon
Wheat and the chessboard https://en.wikipedia.org/wiki/Wheat_and_chessboard_problem
Compounding short stories: the king, Coumbus and Indians http://mastersinvest.com/newblog/2016/4/30/compounding-short-stories
Does an apple a day keep the doctor away? https://www.medicalnewstoday.com/articles/291683.php
Habits are the compound interest of self-improvement https://medium.com/the-mission/habits-are-the-compound-interest-of-self-improvement-6db4c51d1631
Compounding knowledge https://fs.blog/2019/02/compounding-knowledge/
How to become the next Sylvia Bloom https://www.fin24.com/PartnerContent/how-to-become-the-next-sylvia-bloom-20180621
How to use the power of compounding in your marriage https://thehealthygp.com/2016/01/18/how-to-use-the-power-of-compounding-to-improve-your-marriage-in-the-early-years/
The Compound Effect: Summary https://www.scribd.com/read/378874588/Summary-The-Compound-Effect-by-Darren-Hardy