A Second Look at Compounding

Recently I was able to sink sometime into a book that was recommended to me by a colleague (Thanks @Joe) The Compound Effect by Darren Hardy is a book that I had heard referenced a few times, as I frequently read these types of self-development & management books. When I started reading, I felt like this was going to be a very run of the mill self-development book, but while reading I found that I was frequently chuckling at some of the hard line approaches and anecdotes within.

I have been toying this idea of compounding – if you are familiar with corporate finance, present values, compound rates, Warren Buffet's worth, or even the power of 401k investing, you know about the power of compounding.

Hardy goes a bit further in the power of compounding not as a financial tool but specifically in the compounding of actions. As referenced in the book, the difference between the first-place championship golfer is approximately 1.8 strokes better than the second-place golfer. A small 2.5% gain verses the second place, yet the winner receives a $ payout reward that is five times higher than second place. That is the power of compounding, exponential growth. Small changes over time, the longer you stick with an efficient action, the better the result is, the better the result, the greater the reward.

The book was written in 2010, the early days of social media, but I believe if the book was re-written today, there would be a section specifically on the fly wheel that is social media. If compound growth exists in actions, as it does in other areas, well something like social media is a fantastic way to capture the advantages that come with compounding. Social media moves at such a rapid pace, that consistency and quality tend to rise above the noise more quickly than was previously achieved. I am beginning to think that if you spend time consistently investing in your social media presence and provide quality and sincere content, instead of taking say 65 years to amass the compound effect (as Warren Buffet has) you can dramatically reduce the time it takes to hit your exponential growth. 

For example, if you are looking to harness the capability and true growth potential that exists for yourself – let’s say you are passionate about cookies, and you want to sell your cookies online. You need to reach as many people as possible, in the shortest amount of time. If you use social media to consistently drive your purpose forward, you can go through iterations much faster than were previously available. 

Let’s look at some charts. One is Warren Buffets net worth over time. This growth you see is due to the exponential growth of compounding over a long-time horizon, specifically we can assume Warren Buffet is averaging a 17% return each year for 75 years. 

(net worth chart compliments of @GreatMusings)

The next chart shows the impact of a 17% increase for each year for 75 years on a $100 initial investment. Both charts look similar, correct?

So let’s equate this to using social media in our cookie sales example. Let’s say on average we want to gain 1% more followers each day. More followers somewhere down the line correlates to more sales of cookies; we can use followers as a proxy for sales. A 1% increase in followers each day seems reasonable – for a long time that will only be around one additional follower per day. Now let’s take a look at a chart that shows that – and remember, now we are talking in periods of days, instead of years, like the above charts. We will start again at 100; this time it’s followers, not $’s.

 So this chart isn’t nearly as impressive. Over the course of 75 days, if you add 1% more followers each day, you end up at 211 followers at the end of the 75 days, or +111 from your initial 100. Well the power is this, with social media, this is something that you CAN do every single day. You can iterate and get your repetitions in. So let’s say instead of 75 days of straight posting, instead you post and work to gain followers every day for an entire year, or 365 days – what does the chart look like?

Even at a much lower growth rate of 1% vs. 17%, your growth chart starts to resemble more like the exponential and compounded growth of the prior two charts. You have added +3,678 followers over the course of a year. So through repetition on the same task over time, you can achieve that ‘flywheel’ effect or the late term exponential growth from your actions.

And lastly, just one more piece of food for thought. In the social media example, I was assuming a 1% growth rate per day for a year. What happens if grow by 2% more followers each day for a year?

By changing the 1% to 2%, or increasing the growth by just 1%, you got +137,641 new followers in the same amount of time, way more than a 10x result vs. the 1% plan! Instead of putting in years to grow and develop something, you can get there much much faster now. The growth is MASSIVE.

See why just 1.8 strokes, or 2.5% better champion makes 5x more than second place? Compounding will get you there.