The Joys of Compounding. It's a simple mathematical reality: earnings generate their own earnings.

 

This is a fantastic summary of a powerful philosophy. "The Joys of Compounding" is not just an investment strategy; it's a complete worldview for building a rich life in every sense of the word.

Let's expand, discuss, and impress upon this knowledge, focusing on growing net worth and wealth.

The Core Principle: The Eighth Wonder of the World

Compounding is often called the eighth wonder of the world. At its heart, it's a simple mathematical reality: earnings generate their own earnings. It starts slowly, almost imperceptibly, but over time, the curve turns exponential and the growth becomes explosive.

• In Finance: A single dollar invested at a 10% annual return becomes $1.10 after one year. In year two, you earn 10% on $1.10, becoming $1.21. The extra penny is compounding at work. After 30 years, that dollar becomes $17.45. Not from adding more money, but from the relentless passage of time acting on the growing base.

• The Key Variable is Time. This is why starting early is the most powerful financial decision one can make. A person who invests for 10 years and then stops will often end up with more than someone who starts later and invests for 25 years, because the early starter's money has more time to work.

Expanding the Concept: Beyond Money

The genius of the "Joys of Compounding" philosophy, as highlighted by Feroldi and Baid, is its application to intangible assets:

1. Knowledge: When you read daily, you connect new ideas to old ones. These connections form a latticework of mental models. Over time, you don't just have more facts; you develop wisdom—the ability to see patterns, invert problems, and make better decisions in uncertainty. One book informs the next, creating a compound effect on your understanding.

2. Character & Relationships: Every time you act with integrity, you deposit trust into your "character account." This compounds into a reputation that opens doors and creates opportunities. Similarly, investing time in a few deep, genuine relationships builds a network of support and trust that pays dividends for a lifetime.

3. Habits: Good habits (like daily exercise, focused work, saving) are small, positive feedback loops. Doing them once does little. Doing them consistently for years compounds into extraordinary health, career success, and financial security.

Behaviors That Capture the Power of Compounding

These are the actions that place you firmly on the upward-sloping exponential curve.

• Start Early and Be Consistent: This is non-negotiable. Even small amounts, invested regularly, become staggering sums over decades. Automate your investments.

• Embrace a Long-Term Mindset: This is your "edge" over professional traders. You are not competing for quarterly returns. You are a gardener planting oak trees, expecting to enjoy the shade in 30 years. This mindset allows you to ignore short-term market noise.

• Read Voraciously and Reflect: As the image states, "Reading is to the mind what exercise is to the body." Dedicate time each day to learning about businesses, history, psychology, and human behavior. This compounds your decision-making ability.

• Cultivate Patience and Inaction: "Doing nothing is often the most profitable action." Once you own a collection of wonderful businesses (or a low-cost index fund), the hardest but most crucial work is often to hold. Avoid the temptation to tinker. Let the businesses you own compound in value.

• Focus on Quality: "Study quality businesses." Invest in companies with wide moats, capable management, and the ability to reinvest profits at high rates of return. A high-quality asset compounds its value more reliably and efficiently than a speculative one.

• Protect Your Capital at All Costs: The "Margin of Safety" is paramount. One major loss can destroy years of compounding. By avoiding ruinous risks (e.g., over-leveraging, chasing fads), you ensure the compounding process is never interrupted.

Behaviors That Destroy the Power of Compounding

These are the actions that interrupt the process, flatten the curve, or worse, send it into a downward spiral.

• Impatience and Frequent Trading: This is the #1 killer. Every time you sell, you reset the compounding clock for that capital. Trading incurs fees, taxes, and the high likelihood of selling a good asset right before its major growth phase. It turns the powerful magic of compounding into a simple, zero-sum arithmetic game.

• Chasing "Hot Tips" and Speculating: Speculation focuses on price movements, not underlying value. It ignores the margin of safety and is akin to gambling. It destroys capital and prevents the steady, reliable growth that compounding requires.

• Succumbing to Fear and Greed (Market Timing): Selling in a panic during a market crash locks in permanent losses. Buying into a mania at peak prices ensures low or negative returns for years. Both behaviors stem from focusing on short-term outcomes rather than the long-term process.

• Interrupting the Process: The biggest financial mistake is not a bad investment; it's stopping the contributions or, worse, withdrawing the capital for non-essential consumption. This is like a farmer digging up his seeds to see if they're growing.

• Ignoring the Compounding of Bad Habits: Just as good habits compound positively, bad ones compound negatively. Procrastination, laziness, a negative mindset, or dishonest behavior erodes your personal capital—your knowledge, character, and relationships—with the same relentless power.

Conclusion: A Lifelong Pursuit

"The Joys of Compounding" is a call to shift your focus from the frantic pursuit of more to the patient cultivation of enough. It teaches that true wealth is built silently in the background while you live your life, provided you have the discipline to set the process in motion and the temperament to not interrupt it.

The most powerful behavior is to start now. Start investing whatever you can. Start reading for 20 minutes a day. Start acting with integrity in every small interaction. The clock is ticking, and time is the most valuable asset you have. Use it wisely, and let its compounding power work its magic on your capital, your mind, and your character.

Additional note:

Charlie Munger

The greatest harm you can do to your wealth, is to interrupt its compounding by not being able to sit still.

Buy with a margin of safety

https://myinvestingnotes.blogspot.com/2025/11/you-must-buy-at-price-that-provides.html

A Reasonable Price (Margin of Safety):

This is where many investors fail. You must buy at a price that provides a "margin of safety"—a buffer in case your analysis is slightly wrong. Here are some rough guidelines:

A truly great business: maybe 20-25 times earnings.

A good business: 12-15 times earnings.

A mediocre business: 8-10 times earnings (but you should probably avoid these).

The "second act" of compounding—its incredible power later in life. The Core Message: It's NEVER Too Late

This is a fantastic collection of real-world examples that perfectly illustrate the "second act" of compounding—its incredible power later in life. Let's elaborate and summarize these powerful stories.

The Core Message: It's NEVER Too Late

The central, thrilling takeaway from these examples is that the power of compounding is not exclusive to those who start in their 20s. While starting early is ideal, massive wealth can still be built—or a legacy can be magnificently secured—by harnessing compounding from your 50s, 60s, and beyond.

The key is that you must have two ingredients: a chunk of capital (which can come from savings, inheritance, or the sale of a business) and a long enough time horizon (20, 30, or even 40+ years).

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Elaboration & Summary of the Examples

1. Anne Scheiber: The Silent Millionaire

• The Story: A retired IRS auditor who started with $22,000 at age 51 and, through disciplined investing in high-quality stocks (compounding at an estimated 15-20%), turned it into $22 million by age 101.

• The "Aha!" Moment: Look at the numbers backwards. Her wealth doubled approximately every 5 years (using the Rule of 72 for 15% returns).

  • At 76, she had $700k—a great retirement fund.

  • At 86, she had $2.75 million—a fortune.

  • At 101, she had $22 million—a legacy.

• The Summary: Scheiber didn't need a high income. She needed a strategy and time. Her story proves that even a modest nest egg at retirement age can explode into generational wealth if left to compound for another 30-50 years.

2. Warren Buffett: The Billionaire Made in the Second Half

• The Story: The world's most famous investor is a testament to longevity.

• The Jaw-Dropping Statistic:

  • Age 50: Net worth = ~$300 million (successful, but not legendary).

  • Age 60: Net worth = ~$3 billion (now a billionaire).

  • Age 84: Net worth = ~$60 billion (one of the richest people on Earth).

• The "Aha!" Moment: A staggering 95% of his wealth ($57 billion) was built after his 60th birthday. His skill was the engine, but time was the rocket fuel.

• The Summary: Buffett's story demolishes the idea that your wealth-building years are over at 65. His secret is that he has been a disciplined investor for over seven decades. The most dramatic gains came in the final third of his life.

3. The Malaysian Widow: A Local Legend

• The Story: A widow in her 50s inherited a sum of money. She invested it wisely (assumed 15% return) and left $90 million to her heirs when she passed away at 90.

• The "Aha!" Moment: Let's use the Rule of 72.

  • At 15%, her money doubled every ~5 years (72/15 = 4.8 years).

  • From age 50 to 90 is 40 years, which is roughly 8 doubling periods.

  • To find her starting amount, we work backwards: $90m → $45m → $22.5m → $11.25m → $5.63m → $2.81m → $1.41m → $0.70m (or $700,000).

• The Summary: This story shows that a significant, but not unimaginable, inheritance of $700,000 was transformed into a colossal $90 million fortune over 40 years through the relentless power of compounding. It highlights the profound impact one can have on their family's legacy, even from a later starting point.

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The Crucial Mechanism: The Rule of 72

This simple rule is your best friend for understanding compounding. It shows why the rate of return and time are a powerful duo:

• At 4%, your money doubles every 18 years. (Safe, but slow).

• At 8%, your money doubles every 9 years. (The historical market average).

• At 15%, your money doubles every ~5 years. (Requires great skill or high-growth investing).

The examples of Scheiber and the Malaysian widow show that a high compounding rate (15%) over a long period (40-50 years) creates an exponential curve that defies intuition.

Your Action Plan (It's Not Too Late!)

1. Start with Whatever You Have: Whether it's an inheritance, retirement savings, or the proceeds from selling a house, commit a portion of it to long-term growth.

2. Think in Decades, Not Years: Your time horizon at 50 or 60 could still be 30-40 years. Adopt a long-term mindset.

3. Aim for Quality Growth: Don't settle for low-yield savings accounts. Consider a well-diversified portfolio of stocks or equity funds that have the potential to deliver the 8-12% average returns needed for significant compounding.

4. Reinvest Everything: This is non-negotiable. Dividends and capital gains must be plowed back into the portfolio to buy more assets.

5. Embrace Patience & Discipline: The stories of Scheiber and Buffett are about relentless consistency. They didn't jump in and out of the market; they stayed in, through ups and downs.

Final Summary:

Compounding is a financial superpower that rewards patience above all else. While starting young is ideal, these stories prove it's never too late to begin. A person in their 50s or 60s with a disciplined strategy and a long-term view can still achieve extraordinary results, turning a comfortable nest egg into a monumental legacy. The most important step is to start now and let time do the heavy lifting.

Compounding, the 8th wonder of the world.

 Compounding, the 8th wonder of the world.

Elaboration of Section 28

This section is dedicated to the single most powerful force in investing: Compound Interest. It is described as the "8th wonder of the world" (a quote often attributed to Einstein), and for good reason. This section illustrates how compounding transforms disciplined saving and time into extraordinary wealth.

1. The Core Mechanism: Earning Returns on Your Returns
Compounding is the process where the earnings generated by an investment themselves generate their own earnings.

• Without Compounding (Simple Interest): You earn returns only on your original principal.

• With Compounding: You earn returns on your original principal plus all the accumulated earnings from previous periods. This creates a snowball effect where growth accelerates dramatically over time.

2. The Mathematical Magic: The Rule of 72
The section introduces the "Rule of 72," a simple formula to estimate the power of compounding:

• Formula: 72 ÷ Annual Interest Rate = Number of years to double your money.

• Examples:

  • At 4%, your money doubles every 18 years (72/4).

  • At 12%, it doubles every 6 years (72/12).

  • At 15%, it doubles every 4.8 years (72/15). This shows why the 15% target from earlier sections is so powerful.

3. The Two Most Critical Ingredients: Rate and Time
The section uses powerful stories to show that compounding requires both a good rate of return and, most importantly, a very long time horizon.

• The Story of Anne Scheiber (Revisited): She started seriously at age 51. By living to 101 and compounding at 15%, her wealth grew exponentially. The retrospective calculation shows that her $22 million fortune was built from a relatively modest sum that doubled again and again over 50 years.

• The Story of Warren Buffett: The section makes a stunning point: 95% of Buffett's wealth was built after his 50th birthday. His skill was the catalyst, but the time he has been investing (over seven decades) provided the fuel for compounding to work its magic on a massive scale. This demonstrates that the biggest gains occur in the later years.

4. The Ultimate Lesson: Start Early and Be Patient
The section hammers home two key messages:

• For the Young: The earlier you start, the less you need to save. The story of Michael vs. Terrence shows that someone who saves for only 10 years early in life can end up with more than someone who saves larger amounts for 25 years starting a decade later.

• For Retirees (The "Oldies"): It's not too late. While the gains won't be as astronomical as Buffett's, the principle still applies. Consistent compounding at a reasonable rate is the most reliable way to grow and protect wealth, even in one's 50s, 60s, and beyond.

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Summary of Section 28

Section 28 explains that compound interest—earning returns on your returns—is the most powerful force for building wealth, and its effectiveness is determined by the rate of return and, most critically, the length of time invested.

• The "8th Wonder": Compound interest has a snowball effect, where growth accelerates over time, leading to exponential results.

• The Rule of 72: A simple formula to see how long it will take to double your money at a given interest rate.

• The Critical Ingredient is Time: The most significant growth happens in the later years. This is why starting early is paramount, as demonstrated by the fact that the vast majority of Warren Buffett's wealth was built after age 50.

• The Practical Implication: The key to harnessing this power is to start as early as possible, invest consistently, and hold for the very long term, allowing the mathematical inevitability of compounding to work in your favor.

In essence, this section provides the "why" behind the entire long-term, buy-and-hold philosophy promoted throughout this set of notes. It shows that investing success is not about getting rich quickly through speculation, but about getting rich surely through the patient and disciplined application of a mathematical certainty.

You Don't Understand Compound Growth

 

Einstein once (supposedly) said:

Compound interest is the most powerful force in the universe

Of compound interest, Warren Buffet proclaims:

Over time it accomplishes extraordinary things

Compound interest, or growth, is one of the, if not the most, powerful and impactful forces in nature.

And yet, it is also one of the most consistently misunderstood in the world of business.

How so?

Simply, we misapply the term "compound growth" to things that do not actually grow in compound fashion.

Let's first establish what "compound growth" even means.

I propose the following operative definition:

Compound growth ~ constant growth

The fact is, very few objects, organisms or organizations can sustain truly compounding growth over any extended period.

From an observer's or investor's perspective, it's quite easy to fool yourself into thinking compound, exponential growth is much more common than it really is. And it's understandable given how often the term is thrown around. Firms in fleeting phases of fast growth can visually demonstrate their breakneck pace with the ubiquitous, infamous "hockey stick" chart.

Who could argue with that?

As an entrepreneur or operator, you too can fall prey to your own fictions - convincing yourself you've "cracked the code" when you've only really cracked the piggy bank. Irrational exuberance eventually turns concave, finally ending in a plateau of linearity.

Through some examples, I hope to demonstrate that compound growth 1) implies constant growth 2) is exceedingly rare and 3) is incredibly important to building a large, valuable business.

But before we get to business, let's talk about - bacteria.

Bacteria and Bricklayers

In bacteria populations, growth is fixed. Subject to the resource constraints of the environment they inhabit, bacteria grow at a constant rate indefinitely.

A simple example to illustrate the point:

Let's say we have some bacteria that reproduce on a fixed time schedule, one doubling per minute to keep the numbers simple.

We start with a single bacteria cell. After one minute, we'll have two bacteria. With time, the population grows as such:

• 1
• 2
• 4
• 8
• 16
• ...

Now we ask the question, how fast does our bacteria population grow (in percentage terms)?

The number of bacteria cells one minute from now is:

$$n_{t+1}=2n_t$$

Which implies the minute-over-minute growth rate is:

$$\frac{n_{t+1}}{n_t}-1=\frac{2n_t}{n_t}-1=2-1=1$$

or 100%.

This is an example of perfectly compounding growth, also referred to as exponential or geometric growth.

Put simply, how fast the bacteria grow is entirely independent of population size. In other words, growth and scale are perfectly uncorrelated.

Importantly, most things do not work this way.

Layering on

Let's look at another example - constructing a brick wall.

Assume a bricklayer can lay 10 bricks per hour. The brick count will proceed as follows

• 0
• 10
• 20
• 30
• 40
• ...

The brick count grows by 10 bricks per hour.

Going through the same growth rate calculations from above:

The number of bricks 1 hour from now will be:

$$n_{t+1}=n_t+10$$

Which implies hour-over-hour growth is:

$$\frac{n_{t+1}}{n_t}-1=\frac{n_t+10-n_t}{n_t}=\frac{10}{n_t}$$

Notice that the growth rate depends on how many bricks we've already laid. This is linear or arithmetic growth. Because the number of bricks laid each hour is static through time, growth (in percentage terms) necessarily slows down. Scale is in the denominator. Therefore, growth and scale are negatively correlated: more scale -> less growth.

Sure, initially we are growing the brick count quite fast - 100% in fact. But by the time we reach 30 bricks, our forward-looking growth rate has fallen to 33%. At 100 bricks, we'll only be growing 10% - which is a far cry from our halcyon days of tech reporters and venture capitalists gawking at our growing (tech enabled) bricklaying operation.

Two flavors of growth

The key difference between the bricks and the bacteria is that one has scale invariant growth (SIG) and the other... doesn't.

OK OK, friends who reviewed this before publishing said that was a big word/phrase to suddenly drop. So let's take a step back and examine this phenomenon visually before moving forward.

A great way to do this is plot the growth rate of the bacteria and bricks over time:

The bacteria grow at a constant rate over time. For the bricklayer, growth simply... collapses.

I've plotted this chart hundreds of times over the years, and for most startups the growth plot looks eerily similar to the bricks here.

Growth is not the natural order; growth cannot be taken for granted. As we get larger, we get slower.

I mentioned correlation earlier. The correlation between growth and scale in the case of the bacteria is 0 - perfectly uncorrelated.

For the brick count, the correlation is -0.7, a very strong negative correlation.

We've now established two ends of a spectrum we can use to characterize various forms of growth.

On one side, we have linear/additive/arithmetic/correlated growth, and on the other we have exponential/multiplicative/geometric/uncorrelated growth.

The question now is, where do various things fall along this spectrum? Said another way, how accurate is it to say that "XYZ" grows in compounding fashion?

Let's walk through some more examples.

Debt

Compound growth is often used in reference to compound interest earned on a financial instrument of some sort.

Anyone who has ever suffered through mounting credit card debt knows this quite well. Debt grows like bacteria - it multiplies without end at a rate that depends entirely on the interest rate and not at all on the current balance.

1%, 5%, 10% - whatever the interest rate, unless paid off, debt continues to grow without end. If only paid off partially, the remaining balance will continue to grow.

Not a bad business model if you ask me.

World GDP Per Capita

Growth is not the natural state of affairs. For most of human history there was no meaningful economic growth or improvement in livings standards for the average person. Until recently, Life was nasty, brutish, short and... static:

Unless growth is literally contractual, as in the case of debt and interest, we can't take it for granted, as history plainly shows.

And it's not simply a question of the scale of the axis. If you zoomed into that long straight line, you wouldn't see a hockey stick growth pattern. Living standards actually did not improve meaningfully over time for the vast majority of human existence on this planet.

A few years of bad weather, major epidemics like the Black Death (the bacteria strike again), social upheaval - these events drastically impacted the day-to-day well-being and lives of our ancestors, often erasing decades of progress.

Even today, many parts of the world experience major swings in their rates of growth, especially within the developing world. Regions and countries can end up in severe economic doldrums, leading to entire lost generations.

Many stops and starts, fits and spurts.

However, before we get too depressed, let's look at a best case scenario.

U.S. GDP

The good ol' US of A ('s real GDP):

Looks pretty good huh? Let's look at the growth plot:

Ugh, this is pretty noisy. It's difficult to tell if growth is changing in significant ways year-to-year or if it is generally variation around a certain value.

This view hides some interesting detail. One neat math trick - taking the natural log rescales a metric such that, when graphed, linearity implies constant growth.

Do this, and the real GDP chart becomes:

Over this period, we can make a few interesting observations:

• Log real GDP is impressively linear - one could fit a linear line to the above data fairly well, implying reasonably constant growth
• That said, it is not perfectly linear, and therefore not perfectly compounding, per our earlier definition
• We can see multiple distinct inflection points where growth changed, in connection with recessions (1970, 2008)

Taking advantage of these kinks in the curve, let's estimate the growth during each period through piecewise linear regression (i.e. the "line of best fit" for each period):

Annual real growth goes from 3.9% in the 1947-1970 period, to 3.1% in the 1970-2008 period, to 2.1% in the 2008-2017 period.

The economists yelling and screaming that we are on permanently lower trajectory after the most recent recession may have a point.

So not exactly constant growth, but still impressive given the real economy grew 8x+ over this period. Growth has roughly halved over a 70-year period.

In terms of the connection between growth and scale, the correlation here is -0.3, which certainly indicates a relationship, but not a strong one.

We can therefore conclude that U.S. GDP grows in reasonably compound fashion.

Revenue

Most businesses see their revenue growth rate tick down over time. This is even more true for companies that are growing quickly today.

On the other hand, some exceptional businesses have managed to drive truly compound growth over long periods.

Take Amazon for example, which has exhibited incredible revenue growth over time ($B):

This is an impressive chart in its own right. But I am actually more impressed by the log-transformed chart, which is nearly a straight line:

Amazon has grown at a nearly constant rate over almost two decades, despite increasing scale by 64x over the period.

At best, one could identify a slight kink in growth in 2011. Replicating the piecewise analysis, we can see that Amazon grew ~30% year-over-year from 2000 to 2011 and ~23% year-over-year from 2011 to 2017.

Amazon's growth-scale correlation? -0.1!

It's hard to put into words how impressive that single number is. Worth reiterating: most things do not work this way.

Amazon is an exceptional business that has evidently identified a way to grow at a nearly constant rate over many years. A combination of tapping into the long-run secular growth of e-commerce and deft expansion into seemingly orthogonal spaces (for example, via Amazon Web Services) that in fact leverage the core infrastructure the company's built up over time has enabled it to grow in bacteria-like fashion.

Growth functions: Are you adding or multiplying?

Every growing business needs an honest answer to this question: Is your business growing through multiplication, like the Amazonian bacteria, or addition, like the brick wall?

Businesses that simply "add" must necessarily slow down, by the simple math we outlined earlier. Scale begins to work against you, making it harder and harder to maintain a rapid growth pace. Eventually, you will, figuratively, hit a wall.

An example of an additive growth function is paid customer acquisition through a channel like Google Adwords.

Spending $100 on Adwords is going to generate some number of users. Spending another $100 is probably going to generate a similar number of users, and so on.

There's no "magic" here. This is "buying growth" in the most direct manner.

If anything, customer acquisition through paid channels that you do not control (and Adwords is the epitome of this) tends to get less efficient over time as you saturate keywords etc.

Like a bricklayer at the end of a long day, businesses reliant on this form of growth tend to run out of gas sooner or later.

Sure, you can attempt to stack bricks at a faster and faster rate, raising venture capital when you can no longer self-fund the endeavour, building the wall ever higher...

But this too will pass. Eventually, some proportion of those users must stick around and continue to buy from you without meaningful additional spend on your part, otherwise you'll find yourself on the proverbial "acquisition treadmill", unable to jump off without significant disruption to the business.

A number of companies in the subscription e-commerce "send me a box with a psuedo-random assortment of goods" space fall squarely into this category. Users churn at high rates, requiring more and more fuel to be poured on the paid acquisition fire to keep the train going.

On the other hand, businesses that "multiply" can grow indefinitely. Their "growth functions" are inherently multiplicative. Users beget more users. Revenue begets more revenue.

The classic exponential, multiplicative growth function is the viral word-of-mouth (WOM) or referral program.

PayPal built a viral engine in its early days, giving users money for each additional friend they referred to the service:

Dropbox replicated this, giving out additional space for signing up friends:

The act of sharing a Dropbox file or folder with someone who wasn't yet a user generated even more sign-ups:

Whatever the approach, it is vitally important that every business vigorously search for and identify exponential growth opportunities. It is mathematically inevitable that an additive, linear growth engine that does not compound on itself will eventually peter out, or even collapse like a wall built too high.

Likewise, investors must diligently sift through the noise to find the few bacteria-in-a-hay-stack that will drive true, long-term value creation. Ignore the steep trajectory in the short-run. Instead, focus on the curvature of the horizon.

Scale invariant growth is the key to building a large, meaningful business.

Go find it.

Nnamdi Iregbulem

DevOps, application infrastructure, and machine learning nerd. Soft spot for developers ❤️. MBA @Stanford | Ex-Product @confluentinc | Former VC @ICONIQ Capital | Economics @Yale

https://whoisnnamdi.com/you-dont-understand-compound-growth/