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Rashi Goel

How To Reap Benefits of Compounding in Our Life

How to reap benefits of compounding in our life
Reading Time: 8 minutes

This is part 2 of the newsletter on variation vs consistency. In the first newsletter, we discussed variation, click here if you wish to read it before reading this one.

Here, I talk about the importance of consistency. The big idea is that in the short term, we need variation. But in the long term, we need consistency. We can add variation to small things but need to stay consistent in the big ones.

Consistency Compounds

Compounding, as we all know, is a financial concept. When we stay invested in financial instruments, we earn interest on interest and grow our investment exponentially.

James Clear talks about the idea that consistency compounds in his book, Atomic Habits.

While he applies this concept to habits. We know that consistency applied to anything will compound.

James Clear says that if we focus on improving just 1% daily, in just one year, we will be 37 times better. But if we become 1% worse every day, we will be left with just a shadow of our competencies.

James Clear in Atomic Habits
James Clear in Atomic Habits
  • 1% daily improvement over 1 year ⇒ 1.01^365 = 37.8 ⇒ 37 times better
  • 1% daily decline over 1 year ⇒ 0.99^365 = 0.03 ⇒ 99% worse 

Albert Einstein was also a believer in compounding. He said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

Choosing what to compound is the most difficult thing to figure out and then comes the question of how to compound it.

In a recent Tim Ferris podcast, Jerry Seinfeld illustrates these concepts well.

Jerry Seinfeld

Jerry Seinfeld is one of the world’s greatest comedians. He says that he figured out very early on that writing is the secret sauce of great comedy. He knew that unless he learnt to write great jokes, he would not be able to tell great jokes on stage or in his award-winning show, “Seinfeld”, which ran for nine years.

He has built a routine of daily writing. During the time he schedules for writing, he does not allow himself to do anything else. Even if he is unable to write, he does nothing else but sit there and try to write.

He describes his writing process as “very arduous, very painful, pushing against the wind in the soft muddy ground – a wheelbarrow full of bricks. I had to do it. Because you either learn to do that or you die in the ecosystem”.

He goes on to say that writing is 5% collecting ideas and 95% rewriting – crafting the right words until the right turn of phrase ‘pleases his ear’ and agonizing over every little detail. He also mentions that he enjoys the rewriting process tremendously!

This story illustrates important aspects of the “Consistency Compounds” idea.

  1. choose the right levers of success: Figuring out that writing well was the key to success as a comedian was 50% of the battle. It would be a disaster to compound something that is not even critical to success!
  2. choose hard things over easy ones and play the long game: Staying consistent with a writing practice, even when it was hard, was the other 50%. Even when we pick the 1-2 things to compound and we are good at them, staying consistent with it against distractions is hard. The good news is that if we are in the right field, oftentimes, these 1-2 things are something we are good at already. So it is easier to compound them.

Buffet and Business Knowledge

Just like Seinfeld attributed comedic success to the compounding effects of writing, Buffet is the world’s greatest investor because he has compounded knowledge.

His lifelong motto is, “go to bed a little smarter each day”. He compares knowledge compounding to compound interest. “That’s how knowledge builds up, like compound interest,” he notes. He never invests in companies and industries he does not understand.

In the book on his life: The Snowball, his biographer Alice Schroeder recounts his routine. It has been the same for the last 70yrs. He spends 80% of his workday reading. He consumes 6 newspapers, annual reports, and all business information he can lay his hands on. When asked how he spends his day, he says that he reads and thinks.

Choose the Hard Things over the Easy Things and Play the Long Game

As per Naval Ravikant, all self-help advice boils down to this – right choices are invariably tougher to stick with and take time to bear fruit. But they are the right choices for the long term.

That is why, choose the hard things and play the long game.
The short game ⇒ focusing on visible and immediate benefits, from easier choices
The long game ⇒ suffering a little today ⇒ paying a small price today to win big later
Things that have delayed gratification are not always externally appreciated, and might even be boring in the short term. But they become extraordinary and exciting over the long term when they yield success far beyond expectations.

That is why, sometimes just staying the course makes all the difference between success and failure.

play the long game
play the long game

For instance, 
salads over junk food
exercise over Netflix
reading a book, over scrolling Social media
writing, over going to a party
‘adjusting’ the truth to win an argument today over staying with the facts

All are relatively low on the ‘fun’ quotient, but when chosen consistently, result in compounded benefits.

We celebrate the rise of startups and great people, but we forget that it took them decades of back-breaking work to become overnight successes.

American Airlines

To play the long game of becoming 1% better every day, we might need to shed our obsession with scale numbers.

Just like American Airlines.

All American Airlines flights were issued 10 plastic lids for coffee pots, to keep the coffee warm and prevent spillage. One flight attendant sent a suggestion form, asking to halve the standard issue quantity because she noticed half the lids were unused after each flight.

The suggestion was valid, but the financial impact was minuscule – each lid was 1.5 cents. But when added up, this idea was worth $62,000 in annual savings in the profit-challenged industry. [7.5 cents per flight X 2,300 flights daily X 365 days].

American Airlines took the suggestion and rewarded the stewardess.

Stay the Course on the Big Things

For us marketers, staying consistent sometimes gets boring. That is a watch out because the consumer does not get bored of our advertising as fast as we do.
Look at how Coca Cola has evolved its logo slowly and consistently, but Tropicana went too far and then had to retract.

Evolving the Logo over time- consistency compounds
Evolving the Logo over time- consistency compounds
Dramatic changes interrupt the compounding effect
Dramatic changes interrupt the compounding effect

How to Compound? Kaizen and Kaikaku

We overestimate the impact of big actions performed once in a while and underestimate the power of small actions performed regularly.
The ideal way to compound consistently is an intelligent combination of Kaizen and Kaikaku. Kaizen is the practice of making small, continuous improvements. In fitness, Kaizen is 30min of daily strength training, lifting higher weights over time.

Kaikaku is a large, radical change, once in a while. If consistent strength training practice is bolstered by a 5-day CrossFit boot camp twice a year, we take our fitness to a much higher level than with just the kaizen strategy

kaizen strategy

Thousand Years of Kaizen and Kaikaku

That consistency compounds is a timeless truth in the marketing world. The greatest brands have stood for one thing for over 100-yrs.
But Japan takes the cake, bakery, and mill when it comes to compounding.
In 2008, the Bank of Korea studied old companies and found that of 5,586 companies older than 200 years in 41 countries, 56% were in Japan.
In 2019, Japan had over 33,000 businesses, over a century old (Source: Teikoku Data Bank). 
The oldest hotel in the world is the Nisiyama Onsen Keiunkan in Yamanashi, Japan, a hot-spring hotel, which has been operating since 705 AD. Here are some beautiful pictures of this Onsen.

Nisiyama Onsen, Operating since 705 AD
Nisiyama Onsen, Operating since 705 AD
Nisiyama Onsen
Nisiyama Onsen

Japan even has a word for companies that are more than 100yrs old – “Shinise”!

Japan is an isolated island, and that is why the culture values preservation as a strategy for survival. Closing a family-owned enterprise is frowned upon and is even shameful. The generation that inherits the shinise does not want to be the one to put an end to the legacy built and compounded over centuries.

Even these companies have stood for a single core competence. For instance, Nintendo was a global gaming giant in the 1980s, but the company actually started in 1889, to make playing cards. While Nintendo moved from playing cards to electronic gaming, its core competence remained “how to create fun”.

A kimono manufacturer, founded in 1688, Hosoo, has expanded into carbon fibre production to make up for declining kimono demand. The core competency has remained the same – “3-D weaving”.

Da Vinci Postponed Gratification and Practiced Kaizen

Making a quick buck as an artist is an easy choice. Making many paintings as fast as possible means even more money and more praise.
But Leonardo da Vinci painted the Mona Lisa over 16 years. He started in 1503 and sold it to the king of France just before his death in 1519.

The Mona Lisa was perfected by da Vinci over 16 years
The Mona Lisa was perfected by da Vinci over 16 years

He kept working on it, perfecting his brush strokes, and in the process, invented the sfumato technique. 

Billion Dollar Holidays are the Kaikaku of The Retail World

The lifeblood of growth in Ecommerce and retail is everyday low prices – that is their Kaizen.

But the once-in-a-while deep discounting strategy creates a frenzy of buying, as if shopping were going out of fashion. This discount-seeking behaviour unites consumers globally, creating billion-dollar holidays worldwide.

Black Friday and Cyber Monday in the USA, Amazon Prime Days globally, and Singles Day in China – are all examples of retail Kaikaku.

Big Sale Holidays are the Kaikaku of the retail world
Big Sale Holidays are the Kaikaku of the retail world

Given Lots of Time, Monkeys Won’t Write Sonnets

To conclude.

At some point in our life, we all are forced to pick what we want to compound – a job, a competence, a company, a relationship.

What to compound, is a critical decision.

Staying the course despite ups and downs, is difficult.

That is why, it is key to pick something we enjoy and are decent at.

Consistency is simply a game of staying power. There is no shortcut other than putting in the work.

Investing a little bit of effort and time builds habit and momentum and most importantly, small successes. Small successes keep us going. And when the big prize comes to us one day, it all seems worth it.

But it all starts with starting. 1% at a time.