The Power of Compounding

This post is structured into three parts: the power of personal compounding, positive financial compounding and negative financial compounding. To get you hyped on the topic, let me borrow Einstein’s words who said compounding is one of the most powerful forces in nature. If you don’t believe me, listen to him 😉

 

Personal Compounding

What do I mean by personal compounding? While we mostly connect compounding to interest and the financial arena, we can also look at it from a personal perspective and not be so one-dimensional. No matter where we look, be it running an online affiliate marketing campaign, skills like (speed-) reading or our social intelligence, we can work on improving our proficiency little by little. What we underestimate is the fact that many small improvements make a huge difference. Not only do they make a difference on their own, but every single one of them builds upon what has been enhanced before. By improving 1% a day, in just 70 days, we are twice as good!

I am certainly not a writer. In fact, the only two pieces that I put a ton of effort in was writing my master thesis in 2009 and the poker book we wrote in 2013. However, by blogging on average twice a month here on adefy.com and improving my writing just 3% each time (yes it is easy to achieve a 3% improvement rate if you start from that low!) I will be twice as good in a year!

 

Positive Financial Compounding

I don’t have the mental capacity to fully understand compounding effects .. and I think few have. We are capable of understanding and visualising linear growth, but exponential growth is very hard to grasp. Whenever you are able to reinvest gains, your investment will build upon itself exponentially. Compounding growth means your interest earns interest. A growing thing that creates an even bigger growing thing sounds like a good investment promise. You can find a great short guide on compound interest with graphics here and details on why continuous growth is compound interest on steroids. The graph below shows compounding effects on an initial $10,000.00 investment at 1% to 10% return per year. 

Compound_Interest_Example_Yearly_Compounding_of_10000

 

Negative Financial Compounding

One of the best teachers on finance and compounding effects is Warren Buffett. You can learn a lot by just reading his annual shareholder letters. On the topic of fees and negative effects he made a nice little bet vs a hedge fund to prove that those fund managers are not able to beat their management fees. They might have a slight advantage vs. a passively managed fund (e.g. an index fund) but even if so, certainly not AFTER management fees, potentially BEFORE. However, that does not matter much for the investor. You can read the details on the bet on longbets.org 

Buffett showed a chart on the Berkshire Hathaway annual meeting comparing the cumulative returns of the two since the beginning of the bet in 2008. At the end of 2015, the S&P 500 had a cumulative return of 65.7%, outdoing the hedge fund’s 21.9% return. It might sound like a terrible result for hedge funds but not a terrible result for hedge fund managers, Buffett said.

The bet still has two years to go and the winner will get to designate $1 million to a charity of his choice. The point I am trying to make is that compounding effects go both ways and you need to be careful, especially on the slippery slope of financial markets. We will return to the topic of compounding latest when we talk about stocks or index funds.

 

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Thomas Tiroch, aka TwiceT, aka TT.

My one-line pitch is: I am a business addict. In my early 20s, I graduated in Business Administration with a major in Entrepreneurship. Recently, now in my early 30s, I successfully completed a program on Venture Capital and Private Equity.

While formal education certainly does not hurt, I do not think that it is essential for entrepreneurial success. I have a strong opinion on gaining experience in projects or companies by having "own skin in the game". There are just so many skills a business school or university cannot teach us.

From 2008 to 2013 I enjoyed a professional career in playing some of the world’s most popular card games. Yes, these are skill games and you can even make a few $$.

While playing millions of poker hands (mostly online, but towards the end also offline in casinos) I worked as a content video producer and coach for the biggest online poker school. Beyond that I also offered private coachings to players around the world. My blog posts and strategy videos had > 1,000,000 views from platform members. Even though I quit contributing to the blog in 2013 it still is #1 in terms of all-time views on the English site.

At the end of my career I wrote a book (The Education of a Modern Poker Player) with JB, who is a math professor in Nottingham, UK, and Manu, who - fast forward three years - is now the BO$$ of Adefy. As JB tricked me into writing a book with him, I tricked Manu into moving to Vienna in order to join forces with us and work on our united mission.

Things are moving at an enormous pace and we are living in exciting times. My way of experiencing and influencing our world is mainly through my entrepreneurial lenses. Especially since 2013 I dived into full-time business mode and I don't see that changing anytime soon. For my passive stakes I try to mostly invest in companies that generate a positive and sustainable impact, mostly in the energy industry (consulting, renewables, energy efficiency). While I might be below average in many skills, I consider mindset, adaptability, competitiveness and work ethics my biggest strengths.

Interested in: Poker. Venture Capital and Private Equity. Renewables. Energy efficiency. E-mobility. Performance Marketing. Finance. Management. Investing.

Hobbies: Golf. Tennis. Badminton. Reading. Racing. Snowboarding.

Connect with me:

Facebook: https://www.facebook.com/thomas.tiroch

LinkedIn: https://www.linkedin.com/in/thomastiroch

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