Thoughts on compound interest...
When we internalize compound interest, we invest in areas of our lives that compound.
I’m reading Poor Charlie’s Almanac (thanks to the beautiful reprint by Stripe Press), a compilation of Charlie Munger’s quintessential speeches.
Charlie Munger, who recently passed away, never missed an opportunity to compliment his friend and Berkshire Hathaway business partner, Warren Buffet (a wonderful trait in it’s own right.)
Charlie discussed Warren’s infamous ability to think in terms of compound interest. Warren’s innate understanding that $1,000 today would be worth nearly $6,000 in 30 years.
Of course, this deep understanding of compound interest helped Berkshire Hathaway build a market capitalization of $880B today.
Internalizing compound interest has a deep implications for our lives.
When we internalize compound interest, we realize the best investments are in areas of our lives that compound, or build, over time. To me, investing in learning, experiences, relationships, and health are the highest compounding areas.
Investing in learning…
Learning, to me, is the highest order of compounding investment (Please read Paul Graham’s essay on Superlinear Returns on learning’s exponential growth rate. Far better written and more insightful. Thank you PG!)
The more we learn about a topic, the more we understand, and then understand even deeper.
If we learn 6% more about a new topic each year, in 30 years our knowledge will be unrecognizable from today.
Learning compounds vertically and horizontally.
Which is to say, we’re able to learn in more depth as we better understand a topic, or vertical learning.
And, when we learn something new in one topic, we understand our capacity to learn something new in just about any topic, or horizontal learning.
Not only does our ability to learn grow, but our interest likely does too.
Psychologically, familiarly breeds favorability.
Learning comes in all forms. Books, school, working on new projects, talking to someone new, traveling etc.
Investing in experiences is, I believe, a specific type of learning.
Take travel. New places teach us something new.
Experiences have an additional, unique way of compounding. The joy we receive from dreaming about a trip, creating new experiences during the trip, and importantly, the memories of trip, get sweeter with time.
I’m not sure travel along compounds quite as generously as learning, but similar factors are at work.
Investing in relationships…
Meaningful relationships bring great joy over time. The more we invest in a relationship, the more we’re able to understand that person. We can reinvest these learnings back into our relationship with this person, and also with other people.
Investing in health…
Investing in healthy habits makes it easier to be healthy over time. We form a habit. Habits are difficult to develop, but also difficult to change.
Research suggests that health compounds physically as well. The more weights we lift, the more we’re able to lift. As we eat healthier, we crave eating healthy.
At some point, though, there’s demising returns to health. First, we age (and have not yet figured out how to live forever). Second, at a certain point, health improvements become incremental.
As I think about investing my money, I find it easy to invest in these areas; learning, experiences, relationships, and health (in fact, the only two areas I don’t set a budget are for books and farmers markets runs!)
Not so final thoughts…
I know I’m not alone in my admiration of Charlie and Warren. I doubt this will be my last time referencing the book.
My thinking on this topic will likely evolve, and I’ll endeavor to update this post as it does.
Prefer to Listen? Check out Read Aloud.
Reading List:
Berkshire Hathaway by Acquired