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Compounding Beyond Money 🧠 - The Power of Compounding Explained - FutureIQ

21,026 views Wait, is this logic right? • Dec 08, 2023
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Slog Reference: The Power of Compounding

Description

Examples of compound interest are everywhere. And we still can't fathom the power of compounding even after learning it theoretically. That's why we compiled some interesting real-life examples, stories, and more about the power of compound interest to help you understand how compound interest works, how to take advantage of compounding, and where it applies in real life. Watch the complete episode to learn it all.

Hope you enjoyed FutureIQ by Navin Kabra and Shrikant Joshi. Do hit us up on Twitter:
@ngkabra http://twitter.com/ngkabra
@shrikant https://twitter.com/shrikant

Listen it on the podcast provider of your choice: https://tapthe.link/FutureIQRSS
Watch other episodes of The FutureIQ podcast: https://www.youtube.com/playlist?list=PLAppTB0r5_TaYueZ0adD42Wiw5X-wTE4v

Other episodes you may enjoy:
Make 10 Years Plan: https://youtu.be/iZ8wG4bT4wg
Karmanye Waadhikaraste: https://youtu.be/95Zi_4OthbY
70 hrs vs 40 hrs Work Week: https://youtu.be/-RecyHRKWpA

More links:
Atomic habits book: https://tapthe.link/AtomicHabitsBook
Moore's law: https://en.wikipedia.org/wiki/Moore%27s_law
OpenAI Professions that will get replaced: https://arxiv.org/pdf/2303.10130.pdf

Chapters:
00:00 Introduction
01:10 You don't understand compounding
02:27 Sissa's story
06:12 Atomic Habits
09:12 Learning compounds
10:28 Cancer compounds
14:40 Moore's law
18:47 AI & ChatGPT
20:45 MLM
24:30 Compounding principles
28:50 Interruptions in compounding
31:42 Verdict

#futureiq #compounding #compoundinterest

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Transcript

Shan you would have heard of compound interest in school of course I was brilliant at math and then people would have told you that if you save money in a compound interest bearing account like an FD for a long time then when you retire you will be rich every single day since I turned 18 I have heard that every single day that of course is the power of compounding but today I really want to talk about the fact that power of compounding is applicable to so many different aspects of our life not just money like what like Knowledge Learning your habits your number of followers on your YouTube channel or your Instagram and maybe cancer right okay
that took a very dark turn but uh oh by the way power of compounding can be great or it can be horrible so there are lots of dark turns in this episode also okay all right uh semi spoiler alert as well as a trigger warning for those of you uh who might be triggered by these dark turns be careful proceed with caution but uh right so but the important thing that I want to point out is that we have bad intuitions about compound interest right let me uh demonstrate that to you with two puzzle like examples okay okay so uh first uh imagine the Mula River okay and there is water hent a v every year right yeah now imagine that
this weed okay this is just a toy example but imagine that whatever is the area uh of the weed on any given day one day later it doubles you know the weed grows and then two days later it will be four times and so on right okay and in 30 days the entire River 30 days is covered okay right so how many days would it take for half the river to be covered half 15 right in fact a lot of people think 15 and that is your system one thinking yeah right System One versus system 2 one of the earliest episodes we did go check that out and uh yeah of course when you think about it a
little more you realize that because it is doubling every day it would be half on day 29 yeah okay um we will come back to this example what this demonstrates all right all right let's take a different example okay this is a fun and famous uh story okay uh they say right chess was invented in India uh it is claimed that it was invented by a Brahman called sesa sesa sound like a car but sesa the king at that time huh was so impressed with this game that he called the inventor sesa and he said you know what gift do you want in return for inventing this game I'm very happy with you wow and do you know what sisa said
what he said that for the first square of this chess board I want one grain of wheat okay for the second Square I want two grains for the third Square I want four greens for the fourth Square I want eight grein and so on and just up till 64 the King was so angry with sesa that I was I'm appreciating this guy I was willing to give him anything and instead he makes fun of me by asking for a few grains of wheat right he told his uh Minister that just throw those grains at him and kick him out of here and the minister said sir there is a problem we don't have that much
wheat how much wheat was it stop the suspense just tell us okay so I did some calculations and according to my calculations it is if you take all the production of wheat all over the world today not in sesa's time when the population was like tiny today when with all the enhancements and advancements and what everything right and you take the yearly production this is can you guess what fraction of that yearly production is uh sesa's requirement 90% wrong 360 times that's not a fraction that's not a fraction right so that is the problem okay we don't realize how fast exponentials grow 64 by the way this is called exponential because the formula mathematical formula for any compounding
compound interest if you remember it is 1 plus r ra to n so that raised to n makes it an exponential uh in sesa Story the number of grains of rice is 2 raised to n right that's why it's an exponential um by the way why are exponentials important do you remember because exponentials are important they will show up everywhere but last 3 years we had a viral that was growing exponentially don't forget okay please I'm trying to forget that I mean everybody's trying to forget that but we can't really forget it can we Buton that example two to show that we have bad intuitions about you didn't just show it basically established it we have zero
understanding of compounding clear watern or wheat grains of wheat we don't understand the two principles of compounding that I wanted to uh get at through these toy examples one from sesa's example is that we don't realize how big compounding can get that's true from the water hent example we don't realize that most of the growth happens in the last few iterations in fact in the beginning if you look at the water highest in first 15 days you would not even notice it it'll be like tiny am anything in fact what Ray Kur a famous futurologist says is that this is called the second half of the chessboard problem oh right first half of the chessboard sesa is not really asking for
much wheat okay all of it is coming from the second half of the chessboard all of it like way too much of it but at the beginning you said that this power of compounding helps us with our knowledge learning and habits so I'm guessing there must be real life examples of situations also right I'll come to real life examples but let us take the example of another toy example of habits from the book Atomic habits loves playing with toys right I mean doubling as in the case of sesa or the higher synth is not common not something that happens in real life except if we talking about viruses yeah as we seen more common is like a 1% growth right
okay right the important point is the power of compounding even shows up when you have just a tiny growth just if you continue it for long enough right so imagine m you're trying to develop some habit and you promise yourself that you will do 1% better every day okay okay so at the end of one year how much better do you think you will be 365 days a year to not 3 65% of course but 3.65% I guess 1% 365 no that's simple no that's three if you say 365 per that's like 3x if compounding will take it to how much you think uh again I am going to fail miserably at it so don't count me in
this 15% 20 no so you get 37 times better that's 3600% right that's the power of uh compounding really really yes wow um so we don't realize that if you keep compounding for a long enough time how good you can get right compounding happens when the grow growth at each step is proportional to how much you already have so it has to be a percentage most things in life do increase like that okay uh right so for example if you have a th000 followers on Instagram and you make a few posts the number of new followers you get is going to be proportional to how many followers followers you already have because those are the ones how many forwards it gets
how many reposts it gets is proportional to number of followers you already have right so that is why the growth in number of Instagram followers is going to be proportional a percentage of your existing uh number of followers are you on Instagram no I am not on Instagram I'm also I have a an account but I don't really use it so but uh so we've heard that this is how it happens we are more Twitter people you can find us on Twitter this is our Twitter handle right here go on so um anything that grows as a percentage of the current amount is going to result in compounding okay let's take learning for example right you are given a brand new
topic and uh the Wikipedia page of a topic right the way our human brain learns anything is by Taking A New Concept and then trying to related to Concepts that we already know this is similar to that this is similar to that other thing and so on uh right if I try to explain to you how uh Corona virus Grows Right you will relate it to compound interest that you learned in school and so on correct correct which also means that the more Concepts you have already learned the easier it is for you to form analogies for new things you're learning and easier it is for you to grasp new things so that is why you
can learn faster if you already know a lot more if you already know a lot more so your how much you learn in say a given month will be proportional to how much you already know and learning compounds okay that explains why you said Knowledge Learning and habits but you also said something about uh YouTube follows oh that's the Instagram example applicable to YouTube again see comparison and relation huh but then cancer yeah so um let's look at um compounding inside in biology right everything in biology is usually compounding right uh you started off as a single cell a zygote correct right and that cell divided into two corre and those two divided into four and those
four and so on right and you have to reach uh 100 trillion H right so that is one followed by 14 zeros that seems like a lot like a serious lot right do you know how many doublings are needed to reach at this point I'm not going to even attempt an answer I will just tell you the answer just about 45 doublings or so is enough to get 100 TR from one single zyo yes yes remember sesa the power of compounding you it's it's why is it so incredibly difficult to fathom despite having all of these examples told and explained and shown in fact this is one of the biggest problems we have humans we tend to think linearly
yeah but a lot of processes that we are thinking about have compounding so that is going to cause problems we'll come to those but let's look at this right 45 doublings and we have reached shant right maybe 48 looking at my current size but sure but another 10 Lings and we would have a 1,000x so not 48 not 48 so why didn't that happen why did you stop here uh yeah actually why did I stop here right so that's another thing compounding cannot just go on forever it has to stop uh um in our body uh the reason it stops is because there is a certain protein called p-53 which signals to a cell that you know what you
can stop dividing now just one protein well there's a whole bunch of things but there is one important protein p53 which control there's a whole I mean nothing in our body is that simple I'm just course it is not but there is still at the end of the day something that you can point to and say this is where it starts so kind of p53 is where it starts you p53 will tell a cell that you know you can stop doubling now and sometimes it's just based on the size sometimes it is based on is there enough nutrients in the environment is there enough glucose uh right so if you get stunted children that's because of lack of nutrition
because p-53 looks around says there's not enough nutrition let's stop growing right and then you get an underweight child 14 1 trillion cells 10 to the^ 14 and all of them are stopped by one p53 not one each of them have their copies of large numbers of p53 but yeah okay do you want to guess what happens if the p53 stops functioning we I'm guessing the cells continue growing that is cancer a and uh usually it doesn't happen I mean when you are born but like much later in your life I mean constantly cell division is going on right your blood vessels are being replaced every 120 days and your muscles there is wear and tear and their are
being replaced and your bones are growing and so on right all of these mechan isms have a cell division going on and then p53 says okay enough we have enough and then u in somewhere say in the bones if that p53 stops functioning you get bone cancer if in the red blood Corpus I mean white blood Corpus Sals uh which are being produced in the bone marrow the p53 stops functioning you will get blood cancer okay so pasting and terrifying at the same time like one protein has m the ability to completely throw our system as in not one protein but one protein many copies has the ability to throw our system completely out of
whack um let's let's talk some happy examples please because this is making me anxious yes so another area where there's a lot of compounding that's happening is in terms of the number of chips in your computer oh I know this one what what was it called Mo's law law m r e apostrophe s Mo's law if you want to look it up we'll of course put a link in the Des was you know one of the founders of Intel and he had the observation that the number of uh transistors that you put in a chip doubles every 18 months right which means that in that's 1 and a half years so in 15 years do you know how many
times more transition we can stuff in that's uh 10 times the number of years so 2 to the^ 10 correct th th000 X compounding I have started to get a little bit of grasp on it in 20 years how many more can you stuffen uh way too many, into th000 that's a million right and in 30 years that's a billion so the computers used 30 years ago when I started using computers hold on but at some point they will start affecting the plank length and physics will come into play and all of that will you can't fit a billion transistors in the same space as where a thousand transistors go today limits of physics physics student so of
course I'm going to defend it maybe someday we will hit the limits of physics like we said earlier all exponential growth all compounding has to stop because you run out of resources but and that's why more law is not an actual law like Newton's law it is just a observation correct but for 40 50 years it has held so far more or less and we have we're getting to the limits but we haven't yet hit the limits so we continue to get better so the point is that the the devices we have in our hands these days are like a billion times uh more efficient faster than the computers I started uh my career with uh
right so this is way more powerful than the computer that took way way way more powerful than the computer that took men to the moon in 1969 right and yet today if you ask it to take you to the Moon it won't do anything right so one of the things uh uh important things to keep in mind uh is that Computing gets cheaper easier uh it this this applies not just to uh Computing but also applies to things like bandwidth of your internet connection uh that grows uh exponentially we started at 33.6k modems that's 33 kilobytes per second B right you're I mean I started with 14.4k as being like extra fast right that just means you're Buddha that
just means you're old I'm slightly less old than you but so that's the point that uh one of the things they say in the startup world right is that if you build a startup assuming capabilities of computers and network and so on today's capabilities by the time your product is ready it'll all be out of date right so you just have to look two steps ahead and so for example when Netflix started it was not possible to stream movies it was like painful they were actually a DVD by mail service no after when they started streaming time uh streaming was really painful but they were not building for that day they were building for the a
few years later and that's what happened they completely decimated all competition like Blockbuster because it you know the compounding kicked in okay so you have to think of what is compounding right now and then build or prepare yourself for the world 2 years from now so my question to you was can you think of what is compounding like crazy right now that you should pay attention to uh the first thing that comes to mind is all of these AI Le absolutely exactly what I had in mind that what AI can do in fact it is going faster than more slw okay it is not doubling every 18 months it's like going many x times uh every year yeah
the difference between gpt3 and p pt4 is astounding it is incredible and it is a mistake to look at what AI can do today and make your decisions based on that you have to think of what it is going to do two years from now and plan accordingly it's a crazy world and this applies to every profession out there we might be replaced by AI in about 20 episodes we don't even know that there's a there's a possibility that you will be seeing generated versions of of us while we are sitting in our chis and banyans at home eating noodles and doing nothing actually if if it helps open AI has come up with a helpful paper which gives a
list of professions and how much of that profession is going to get automated by AI in the near future this is like putting results on a notice board and seeing have I passed fail it's fun you should check it out yeah please we'll put the link in the description I haven't checked it out yet I will the first thing I'll do after this episode is over is check that out no I want to still talk about a few more places where exponentials show up okay and then after that I want you to also tell me what happens when these exponentials eat up all the resources that are available because that is that is bound to happen right come to that
right but there is an entire area h u of scams called multi-level marketing and pyramid schemes right so let's take one example of that okay uh this is something that used to happen in Russia say like 100 years ago okay and variations of it happen even today okay so imagine a Bicycle Club okay imagine a bicycle costs 5,000 rupees okay okay for 1,000 rupees you get entry into the Bicycle Club okay and The Bicycle Club allows you the following okay you pay 5,000 rupees you buy a bicycle and you get five entry passes to The Bicycle Club which you can sell to other people for th000 rupees each right so see what has happened you paid th000
Rupees to get into The Bicycle Club correct you paid 5,000 to get your bicycle but you got 5,000 wor of worth of tickets you sold those tickets to five people correct and you have now gotten a bicycle worth 5,000 in just 1,000 rup correct okay now those five people why will they bother to buy these tickets because they get the same deal they get the same deal they will be able able to use that ticket huh to get a bicycle for 5,000 and then sell it to five other oh I see it right so you can see why people would be so excited like getting a bicycle for 1,000 rupees which is not excited I'm already looking two
steps ahead compounding remember we've been speaking about compounding all this time yeah so where does this break down this breaks down I think by number six most likely uh as in the sixth level of people because the first person sells it to 5 people the next one sells it to 5 25 125 625 3125 and you know all of the powers of five and what is wrong with your brain this guy has like the randomst of information stuffed in his brain in a small number of steps correct right these people will run out of customers for The Bicycle Club and when I said not because the Bicycle Club is not interesting correct but because there are no more people left in
India or the world for that matter right so that's I mean every exponential has to run out of resources here resources are the number of people buying bicycles um so similarly you might have heard of pyramid schemes multi-level marketing companies which say you know what you buy products from us we are cutting out all the middleman you buy products from us and then you convince somebody else to join and you get commission for selling it but and you convince somebody else to join you get a fraction of their commissions and if they get someone else to join you get a fraction of a fraction of their commissions and you can be rich right and the only person getting rich
is the person at the top who started this entire business first two three levels Imagine The Bicycle Club right the first guy the next Five Guys the next 25 125 625 a lot of them would have gotten their bicycles it's only the lower level which is where most of the people are though by the way those are the ones who are stuck with tickets they cannot sell right so the first few levels get rich and their stories will be all over right there those stories are the ones that are going up in press releases and Instagram and this and that right yeah the bulk of the people are going to lose money correct because that's how
ponential work intuitively we don't understand compounding and that's why uh we make mistakes so I think it might be useful to go through a list of principles that you should remember pleas as far as compounding is concerned right absolutely please so first and very important right that we think linearly right so if we say that uh in 10 years I want to have uh you know 1 CR rupees then you expect that first year will be 10 lakh second year will be 20 lakh third year will be 30 lakh and so on right that's linear thinking if it was actually actually earning money is also uh an exponential uh system like a compounding system okay
so what is going to happen is that the growth is going to be flat not flat but very slow initially and remember the second half of the chessboard most of it is going to be in the last 2 three years right so keep at it and then watch it finally explode in the second half of what happens in the first half is that the returns that you are getting will be far lower than what you were expecting because you are expecting linear and the returns are low what happens in the second half is that the returns would be far higher than what you were expecting linearly because I'm guessing that the first half is basically spent in collecting the Corpus
that will then grow exponentially as in that will then suddenly uh explode explode because you have this Corpus and now this Corpus is going to double or whatever so this is actually true in some sense of any business that you create or a startup or something right that initially first two three years are going to be a struggle because the number of customers is a compounding growth the amount of money you make is a compounding growth the amount of publicity you get is also compounding so the first few years are going to be worse than what you expected but only when you stick to it that things suddenly get much smoother later on right this suddenly gives a whole new
meaning to the idea of viral growth absolutely suddenly going viral it's not sudden that you go viral it's basically that things have been building in different ways and then one particular moment where the growth goes not a moment but it looks like to us like a moment when it crosses over from so that that that initial period you're going to be a little worried about what is happening and then once it crosses the part where linear expectations exist and goes into a hocky stic kind of a thing is where one very famous example people give of the power of compounding like this and the slow start and the fast growth is Warren Buffett right he is I
mean you know one of the richest men in the world and uh net worth of you know more than 80 billion yeah most of that was accumulated after his 50th bir he started his Investments at the age of like 23 or something like that most of his wealth came after the age of 50 and in fact of his 80 billion 70 billion came after his 61st fifth birthday right after he retired yeah right so that is the slow start and second half of the chessboard right uh different way of saying this and uh I like saying this for many many things is what is called the Bill Gates principle okay which is that we overestimate what we can achieve in one
year and we underestimate what we can achieve in 10 years the reason is because our estimates are linear okay and usually what we are trying to achieve is compounding right so the first few years are going to be underwhelming it's called the valley of disappointment and the last 3 four years of the 10 are going to be like are going to exceed your expectations like crazy so uh what I say is do not make one year and twoe plans make 10 year plans okay that's easy to say but I also see why that is important to do now make 10 year plans and stick through the first few years that's the question I have how
about I'm trying to learn a language and I'm putting in that extra 1% effort every single day not extra as in 1% better than every single day let's make it weak but uh what if I lose out on a particular week or what if I'm trying to lose in general in general this thing about compounding is that interruptions are not uh good right I mean let's again if we take the example of 1% better every day and you get 37x better at the end of the year now suppose you just you said you know I'm going to relax on weekend so I'm doing 1% better every weekday okay so out of s days 5 days you're doing uh for the
whole year now instead of 37x better you not getting like 27x better it falls down to 13x better only uh that is more importantly if the weekends when you skip not only do you not make any progress but usually when you take a break you also slide back a little bit h right so if you assume that 5 week days you're getting 1% better every day and then the two week ends you're getting 1% worse each day okay then you'll only be 4X better at the end of the year right so interruptions are bad what you have to do is keep going right okay right consistency is important but also keep in mind that the rate uh 1% is Tiny
right the rate is not that important doing it over a long term is important so which is why you should pick something that is sustainable right most people when they do a New Year resolution they take on too much right oh you know I'm going to run 5 kilometers every day and if you have never run before 5 kilometers you will run for the first three days by the end of the week you will give up right yeah instead you can start something trivial like you know I'll just run 100 m every day right or I'll just put on my shoes and go out and come back every day and just get a little better on basis Atomic
habits yes right I read that book fascinating it is yes we will do an episode on that but in general detailed episode we'll do because it is absolutely brilliant and you go ahead read the book we'll still do the episode there are thousand videos episodes podcasts on the internet about Atomic habits but we'll still do an episode because it is just so fascinating as a concept and as something that spoken about yeah so consistency is important yeah yeah consistency is important and not skipping is important not skipping specifically in terms of consistency yeah uh all right so let's let's quickly summarize what we've done uh until now uh consistency is important uh we don't really understand the end product of all
of the compounding I mean basically remember that there is a slow start and most of the growth comes at the end second right so keep that in mind uh and set your expectations accordingly uh both in terms of you will not see that many returns in the beginning but you have to keep doing it because because compounding the power of compounding and because oh yes another episode that you should Reas why K makes sense is because um you know compounding pays off much later at the end at the end and in the beginning you have to just keep doing it because you think this is the right thing to do right and it works and yeah
consistency uh is important right the rate can be small don't bite off more than you can chw in fact don't even bite off as exactly as much as you can chw do less so that you can sustain it without causing problems for yourself and don't worry about the outcomes you are getting at least initially epode check it out and let us know what you thought of that episode this episode and all our episodes we love comments we love listening to you we love all your love that you shower on us Shri Kant naen this is future IQ thank you thank you for watching till the end if you like this episode check out these others you might like them
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