On Compound Growth (Part I)

1/ Real success, both monetary and otherwise, comes from sustained, compound growth over a long period of time.

2/ It was claimed that Albert Einstein once said that "Compound interest is the eighth wonder of the world, He who understands it earns it… he who doesn’t… pays it".

3/ But in order to achieve sustained compound growth, it is important to understand why most people fail to get it.

4/ The first major roadblock to compound growth, for an individual, is over-leveraging with heavy debt and being forced to liquidate and lose it all. Leverage amplify returns on the way up, but in a bear market can wipe out years of accumulated wealth in a single day.

5/ This lesson is very hard for people to learn, as it is human nature to take chances and use leverage to reach a goal quickly. Any initial success with leverage will only reinforce that conviction, which may require multiple forced liquidation and wipe-out for people to get rid of. If you do not have the temperament to abstain from leverage in spite of enticement of short term gains, you won't be able to truly appreciate and achieve compound growth.

6/ Another form of over-leveraging, is committing a lot of resources to chase an ambitious target with an artificial and unrealistic deadline. The school system indoctrinates students to work hard to reach a pre-determined goal quickly, and glorifies the hard work and sacrifice, no matter the cost. People automatically accept this as the only way to approach a problem. When taking to the extreme, this can be both counter productive, and very bad for your mental, physical and financial health.

7/ A prime example of this, is e-commerce pioneer Webvan, which raised close to $800 million in combined capital from 1997 to 1999. At the time of its IPO in November 1999, the company had a meager cumulative revenue of less than $400 K, the infrastructure for home delivery of groceries was simply not ready yet, and Webvan had to file bankruptcy merely 19 months after the IPOs. All shareholder equity, was completely wiped out.

8/ There are many reasons why people get overly ambitious. One of them is envy. When we see someone we know or can relate to, suddenly become much richer than us, our blood begin to boil, and the emotion of envy and FOMO (Fear of Missing Out) will overwhelm any common sense that is still left. The story of sudden riches of our neighbors or former colleagues may be wildly exaggerated, very much nuanced, or simply a fabrication. But we don't care, we just want to get rich right now, right here, and consequences be damned.

9/ The second roadblock to compound growth, is more insidious. It is very easy to get stuck in a narrow area where the market is saturated and growth is almost nil, so any extra effort, no matter how much, will not yield any meaningful progress. You may be working really hard, but there is no real growth.

10/ Why do people get stuck and why can't they get out of it? For one thing, even if one is getting stuck on a dead-end pursuit, there is usually huge sinking cost with whatever he/she is doing now, and huge ramp up time/cost involved to start in a new area.

11/ Most people who are on a salaried job, do not give themselves enough time outside the regular job to gain knowledge in other areas, so they also find it very hard to overcome the hurdle in ramping up on a new project.

12/ If you get stuck after a while, don't blame yourself and don't keep doing the same thing. It pays to realize, like Warren Buffett once said, that stepping over one-foot hurdles is much easier and also more profitable than trying to jump over seven-foot hurdles in vain. Maybe it's a tough time for the industry, maybe it requires certain skillset that takes time to build, don't force yourself. Spend more time to go out and find zillions of other one-foot hurdles.

13/ To borrow from Thomas Edison, "Success is spending 99% of time discovering one foot hurdles, and 1% of time stepping over them". Most people have it backwards, they spend 1% of time searching, find one seven-foot hurdle, then spend 99% of the time trying to jump over it. After repeatedly failures, they get exhausted and depressed.

14/ So how do you go about finding more one-foot hurdles? There is no quick one-size-fit-all answer, but it is important to recognize that, the world is much bigger and diverse than you know, you should take that seriously and start systematically building a network of information sources for yourself. If you do not constantly and proactively seek information from the outside world, how can you be sure that you are even on the right track with what you are doing right now?

15/ Don't let your understanding of the world be misled by narratives from so-called "mainstream media", written by people no smarter than you. Whenever possible, go directly to the source, get first-hand information. Use Twitter, Wikipedia, Google, Discord, Reddit, Kindle e-books, etc. , read voraciously, cross reference multiple independent sources, double check, triple check, *** distrust and verify ***. As you spend more time doing this, you will get better at filtering out the noise and capture the signal, you can also do it faster without spending a fortune.

16/ Information network is the input channel. The other part is building an effective output (distribution) channel. Before the advent of mobile/cloud computing and social media, media gatekeepers in TV/Radio/Newspaper control the distribution and the narrative. They are the bottlenecks in the economy, and part of the reasons why sometimes you get stuck, as good products with an ineffective distribution is next to useless. Nowadays you have all the tools available to go direct to your audience via multiple social media platforms, instantly, at near zero cost. You just need the time and patience to build your distribution channel to a scale where it starts to matter. On social media platforms like Twitter/Weibo, once you have more than 20 K followers, you will start getting meaningful engagement from the outside world. Once you have over one million followers, your reach and influence is on a par with major national newspapers, but much faster and interactive, and also free for you.

17/ Once you have spent enough time building an effective information network, you will realize that there are lots of things you can explore and experiment. Previously you only went after one market segment, you thought there was only one way of doing business, now you realize the market is much larger than you imagine, and there are many more indirect and less intrusive ways to monetize your product/service. You become more flexible and ready to change your mind quickly based on new incoming information.

18/ Also because you own an effective distribution (output) channel, you can keep the cost of your experiments low. For example, for someone who do not have their own distribution channel, it might cost $x of advertisement dollar to acquire a single customer; With a robust social media presence and a large targeted email list, you might be able to reduce that acquisition cost to $x/10, or even $x/100, $x/1000.

19/ As you experiment, don't be bound by any pre-conceived notion of what will or will not work. Chances are you will get lots of surprises, mostly negative. Keep an open mind and keep all options open. Watch carefully for feedback, any direction that is not generating enough positive feedback, is not worth spending much time and resource to explore further. Try testing elsewhere. Since the cost of your experiments is small, you can afford to be prolific, Watch for things that is generating unexpected positive feedback, with lots of experiments, you will eventually hit one, double down on those areas, you may strike gold.

(To be continued)