So many of our important endeavors in life come down to long-term compounding over the years. Our retirement, the success of our kids, our health. All these normally grow (or shrink) imperceptibly day by day.
And yet, it’s a concept that’s really hard to wrap our minds around. I probably think about it to much. Here’s some of what I’ve noticed.
5 Observations On Compounding
- You’ve got to stay in the game to experience it – If all the benefits come at the end, from compounding, then the key is to stay in it long term.
- How do you do this? In order to stay in it long term you’ve got to change it up. Take breaks. Be refreshed. You’ve got to constantly be learning new things. Trying new things. Exploring. Getting outside the normal barriers. Digging deeper than anyone else within the normal barriers. Keeping it fun.
- People say, “the more you learn, the more you learn.” I think that’s true, except I’d add “As long as you’re around for the payoff.” In real estate the payoff on new knowledge can easily be one year or more.
- Capital compounds – This is fairly automatic in real estate. The key is to avoid messing up the compounding by committing one of these two errors:
- 1. Pulling out returns to buy luxury goods.
- 2. Suffering massive drawdowns in capital. (AKA losses.) The top two ways to lose money in real estate are getting stolen from and vandalism.
- Even things that are hard to quantify compound –
- Relationships compound – People you like introduce you to their friends. You do one deal with someone and the next one is way easier, then the next one.
- Experience and judgement compounds – As long as you continue to push your limits and reflect on the lessons of success and failure.
- Let me introduce you to deal snowballs – A simple purchase of your own home to live in can easily snowball in to purchasing a 40 unit apartment building. The key is in pushing your comfort zone. The key is in starting, and not stopping.
- Step 1: Start the snowball. Step 2: Keep it rolling
- The hard part is that the accumulation feels extremely slow. At first, you can hardly notice it. But it grows. The percentage accumulation may stay the same, but the absolute levels become drastic.
- $100,000 growing at 20% over 20 years becomes $3,833,759.
- Year one, it grows by $20,000 Year twenty it grows by $638,960.
- The power of compounding can blow you away. Look at your life 10 years ago. I guarantee there’s some aspect that has compounded drastically over that time. Maybe for the better, maybe for the worse. Maybe you planned it, maybe it just compounded without your knowledge.
- We have trouble with the concept of compounding – It’s not readily apparent. In todays terms, it seems insignificant. But over time, it gets crazy.
- So few things in our natural world grow at a compounded rate over long periods of time. It’s understandably hard for us to wrap our minds around. Warren Buffett calls it the 8th wonder of the world.