How Are You Embracing the True Power of Compounding?

I have been reflecting on the talk Will Thorndike gave to our BFL class last Sunday. At its core, compounding is not just an investment strategy but a philosophy of life, which I wholeheartedly agree with. Not to completely geek out (because at heart I am a math geek), but just in case you are not familiar with the mathematical formula for compound growth rate, it is 1 plus the annual growth (i) taken to the Nth power, where N is the number of years. A couple of things that we as humans tend to misunderstand about life. First, we assume our growth is linear, which it is not. It is exponential. Meaning that you do not learn or grow equally in successive years as you did in earlier years, you learn and grow way more as long as you give yourself time. Switching costs (churn) are massive, and yet another reason why the five-year fuck around rule is so important, because once you really start your career, you want to be committed for the long term. Think about the impact of divorce, and you will understand why this is true. The second is that even if you understand that life is exponential rather than linear, the tendency is to focus on the rate of growth out of the gate rather than the time period, which is actually way more powerful. I created the Matlack Formula because an investment that returns 35% over two years (or 1.8x invested capital) actually kind of sucks, especially if I have devoted tons of time, capital, and opportunity cost to make that investment possible. By contrast, an investment that returns 20% but over 10 years generates 6.2x (in search of north of 5x is considered a good outcome). In your career, in your friendships, in your reputation, in your romantic relationships even (I have been married twice, once for 3.5 years and now for 23 years…but not sure I really have the right to comment there…), in terms of everything in life, think about the N and don’t get sucked into the flashy growth rate. Will is hardly a flashy guy. And yet he is the most respected investor of a generation. And his focus these days is on very boring, pedestrian businesses that can grow at 20% IRR, not just for 10 years (which would return 6x) but for 20 years (which would return 38x) and beyond.