1% Smarter Newsletter No. 13: Compounding
What I'm reading, listening to, and learning from the week ending 2/27/22
Albert Einstein reportedly said that “compound interest is the eighth wonder of the world.” Growing up with a parent in the financial services industry, I learned from a young age the power of compounding. It turns money into more money at a literally exponential rate, without the investor having to lift a finger. It is responsible for supporting millions of retirees’ lifestyles. It allows governments to borrow against future tax revenue. At times, compounding is hardly distinguishable from magic.
I failed to appreciate until more recently, however, that the power of compounding applies not only to financial capital—it applies to human capital, too.
Of course, I am not the first one to realize this. Warren Buffett exhorted his acolytes to “read 500 pages…every week. That’s how knowledge builds up, like compound interest.” Naval Ravikant shared a similar sentiment in his canonical “How to Get Rich (Without Getting Lucky)” tweetstorm, saying, “Play iterated games. All the returns in life, whether in wealth, relationships, or knowledge, come from compound interest.”
But what exactly does compound interest look like outside the context of finance?
I started a new job a few weeks ago. Every since graduating college, I experienced the first six months or so of a new role according to a similar pattern:
Utter paralysis from the surfeit of new information bombarding my brain.
Despondence that I would never, ever learn a fraction of what I needed to execute my responsibilities at even the most basic level.
Grudging acceptance of the possibility that, with lots of handholding from my manager and peers, I may avoid termination at least until my first review period.
Eventual optimism that, despite being on a steep learning curve, there would be a decent chance I could grow into my role and—one day!—deliver outstanding results.
Yet after my most recent job change, I discovered I had skipped steps 1–3 and jumped straight to the last one. How on earth did that happen?
Compound interest. Let me explain.
At each previous step in my career, I was developing the skills and knowledge I would need to eventually excel in my current role. For example, right out of college, I worked for an economic and financial consulting firm. There, I learned not only hard skills like Excel modeling and financial arcana, but also things like juggling competing deadlines, managing up, and developing a high standard for the quality of my work. My next two roles introduced me to the fast-evolving fintech consumer lending space, where I honed my credit risk and analytics knowledge as well as my ability to navigate a startup (dis)organization. I developed techniques to manage direct reports and work cross-functionally, to secure stakeholder buy-in and establish rapport and credibility.
Over time, the skills gained from those experiences have compounded into a modest amount of human capital. There are literally thousands of jobs I cannot do, but I do feel fairly capable in my role building the credit program at an unsecured consumer lending fintech.
Of course, I know just enough to grasp how little I really know, so please, dear reader, do not mistake this self-reflection as arrogance! (As a colleague at my new company likes to say, this is the biggest role any of us have had.) Rather, I merely acknowledge that I have entered the phase of my career where my specific knowledge and experience, in addition to my general intellect and work ethic, enable me to contribute in my new role.
I work with an advisor who has spent four decades in consumer lending as a credit expert. The human capital he has built over that time is mindboggling: relationships with executives across the fintech landscape, understanding of the intricacies of financial regulation, informed points of view on myriad vendors offering their wares, and frameworks for how to develop a credit program. He is a testament to the power of compounding. It took him his entire career to develop this level of authority by growing it every week, in each new role, and today, he can leverage it to unlock massive value.
Beyond his advice and introductions, this advisor assists me in another way: he personifies compound interest incarnate in a way I find exceptionally motivating. Seeing his capacity for impact demonstrates what could be possible if I commit to a lifetime of learning and growth in my domain.
In this week’s featured content, Lex Fridman and Tim Urban discuss this very topic (along with many others). Around the 1:48:30 mark of the interview, Urban captures this thesis:
If you do a little of something everyday, it compiles. People who achieve these incredible things in life, they got a little done everyday. And that adds up to a monument.
I am not quite a decade into my career, so my journey has barely begun. But the investments I make in my knowledge and skills today will pay off immensely in the coming years. If this holds true, compound interest really will feel like magic.
💡 Featured Content
My top pick this week
🎧 Tim Urban: Elon Musk, Neuralink, AI, Aliens, and the Future of Humanity by Lex Fridman
🧠 Learning & Development
📺 Solving Wordle using information theory by 3Blue1Brown
📺 Oh, wait, actually the best Wordle opener is not “crane”… by 3Blue1Brown
📄 The Nocturnals1 by Faith Hill
📄 How to Want Less by Arthur C. Brooks
📄 How We Changed Our Minds in 2021 by various, edited by Bari Weiss
📄 Carol Dweck: A Summary of Growth and Fixed Mindsets by Shane Parrish
📄 The Buffett Formula: Going to Bed Smarter Than When You Woke Up by Shane Parrish
🖥 Web3
🐤 Twitter thread on the Coinbase Super Bowl ad by Brian Armstrong
💰 Money & Investing
📄 Survey: Consumers Talk Financial Regrets, Credit Scores and Debt by Noelle Robillard
🌐 Miscellaneous
📄 How Covid Stole Our Time and How We Can Get It Back by Tim Urban
This piece in The Atlantic offers an interesting addendum to last week’s featured content about, inter alia, introversion.