Law of compounding – for real life improvement

Affirmative action, compounding, Human Brain

I read – maybe 10 years back – Delivering Happiness by the CEO of Zappos – Tony Hsieh. I don’t quite remember everything in the book except that it was the journey of Zappos. However there is one statement from the book which Hsieh makes, which has remained with me since then, if you can improve even 1% everyday, imagine the improvement you will have at the end of the year – 367%. However inspite of having read it and also put it on a board where I could see it everyday, I have not improved 3670% in the last 10 years. The idea is simple I understand it but I still don’t go about achieving it.

The Japanese have a incremental improvement method called Kaizen which is about bringing about small incremental improvements continuously resulting in massive improvements over a period of time.

Both seem to be very simple concepts but we don’t end up following them. If you have been following my blog for sometime you would have noticed that as I am getting more experienced at writing things I am also questioning things about how I can be improving myself. Right now I am working on improving my reading capabilities. I have an agenda to read at least 3 books every week, consistently over the next few months, inspite of all the extended working hours we are having due to the lockdown. I want to check if I can improve my reading, which means I gather more knowledge, which then I try to put into action and therefore improve myself on a regular basis.

Yesterday however I was watching a YouTube video of Dan Sullivan of Strategic coach and he explained a very simple concept because of which I may not be achieving our goals for real life improvement. His logic is that there are no impossible goals, there are only impossible timelines. And because we give impossible timelines to ourselves, we end up messing up on achieving our goals. In case you are interested you can watch the video here.

As per him if we were to give ourselves long enough timelines, then our brain will not put barriers. The timelines he talks about doing a 10X is 25 years and breaks it down into quarters. So in 25 years there will be 100 quarters. If we were to use our compounding equation S=P*(1+r/100)^n. So if we put P=X and S=10X and “n” =100 then “r” turns out to be just 2.5% growth per quarter.

Is it feasible to improve 2.5% per quarter or less than 1% per month. Should be possible. If we were to break down our improvement points into clear bite sized goals then 1% per month should be very feasible and 10X in 10 years should also be feasible.

The reason this compounding works is because as a human being when you improve the first time, the next improvement is over the previous improvement and this cycle can continue forever. This is exactly how compounding works on your money and this how compounding works in real life as well. However our brain is conditioned to think in terms of linear activities. It is just not capable of comprehending non-linear equations like compounding and therefore whether it comes to money or self improvement our brain plays games with us.

Its one of those laws which are universal in nature and should apply to me as well. If I can improve by more than 1% every month in different areas of my life, based on the knowledge I acquire by reading the books and taking action, I should be able to grow. Let me see how this goes. Just to share the progress in the last 3weeks I have been able to complete 8 books. All non fiction books. These include Crushing It by Gary Vaynerchuk, Bold by Peter Diamandis, Attackers Advantage by Ram Charan, Triggers By Marshall Goldsmith etc. All these books are quite dense, as you will see in the picture, but I am trying to keep to my target.

Let me know if you also see Compounding in other areas of your life. I will be very interested in hearing your story.

Till next time.

Carpe Diem!!!

Systematic Investment Plans

Financial Independence, Uncategorized

 

Recently I was watching a program on television channel ETNow ….it was programming related to Systematic Investment Plans. I am generally not very interested in watching content based on SIPs. It’s a well understood concept to me about how time and price averaging over long periods gives amazing results because of the discipline of continuous investing with small sums and the magic of compounding.

What however got me interested was the concept the speakers were talking about “Sahi SIP”. “Sahi” is a word in Hindi which means the right thing. So what got me interested was the idea that not all SIPs are the same. You could search for this episode on the Youtube channel of ETNow.

SIPs have to be decided based on your goals.So not every SIP can be applicable to everyone

While the basic concept of SIP is that you automate your investments and pay yourself before you pay others.

If regular investments are left to decisions of human beings then they will every month find some reason why they are not able to invest.

However with SiPs because the money goes outfrom your bank account  before you even know, you learn to adjust your expenses according to what is left. The first few months are a little tough but eventually you figure out ways to get your expenses into control. i am a ready example of that.

Now coming to the”sahi or right” SIP….. what the speaker mentioned was that based on your goals you need to decide on the investment vehicle or mutual fund scheme and the amount that you will be willing to invest.

One other aspect was how inflation eats into your goals. However because of inflation you also get salary increases. If you can increase the amount of SIPs based on a certain percentage of increase in your salary, then you can control the inflation monster from hurting your goals.

So there is no one size fits all. You need to identify the goals at different stages of your life and accordingly decide on the type of schemes you want to invest.

However the one thing which I have been mentioning for a long time in all my posts still stands….. you need to start early in life. The longer your runway the bigger is the magic of compounding.

Till next time….