“The greatest shortcoming of the human race is our inability to understand the exponential function.” - Albert Bartlett
I can put my hand up and admit that I never 'got it', but if I can encourage others I will be pleased. As compounding is not intuitive it is invariably overlooked and never truly appreciated by most.
No time for compounding!
Certainly I have repetitively broken the golden rule:
“The first rule of compounding: Never interrupt it unnecessarily.” - Charlie Munger
I have always been too smart to hang around, although in my case I put this down to primarily have a shortage of capital. However there are times when you have to relentlessly leave something that looks small alone so it has a chance of compounding into something big.
Let's take an interest rate return. If you earn 5% simple interest on $100 over say 5 years you can quickly reply that earnings are $25. However if the same earnings are compounded most will have to reach for the calculator...( 100*1.05*1.05*1.05*1.05*1.05 = $127.63). Extrapolate compounding and invariably the results will amaze. It is so easy to overlook how powerful it can be to take something small and hammer away at it, year after year, without stopping.
It is such a cliche' to bring Warren Buffet into this conversation but as we have alluded to previously, Buffett's biggest contributor of alpha is his permanent capital and and his longevity. The permanent capital means that he doesn't touch his capital base for lifestyle choices or whatever else we need cash for.
As Morgan Housell has written so succinctly : "Start investing as young as you can. Encourage young people to do the same. Build a reputation through small, consistent acts. That’s where everything huge begins."
