Skip to content

The Compound Principle

April 28, 2010

This isn’t a post about money, so please stay with me. One of the most widely known principle in building wealth is the compound interest principle.  To over simplify it , putting in X amount of  units yields more than X and over time yields multiples of X. The key is reinvesting. (with a 10% interest rate, $100 in year one becomes $110 ; in year two becomes $121; in year three becomes $133.10, etc…) It is what every investment strategy is based on including your 401k. Even with recessions and bumps in the road, over enough time – it has always worked. So if this principle works in finance, where else can it work?

Believe it or not, there are many other areas in which it exists. Energy? Yes. Have you heard of Breeder reactors?  Business? Yes – Successful people see it all the time. Perhaps part of the secret in becoming the best of the best actually is practice (doing things over and over). Even in Gladwell’s outliers, he makes the case that 10,000 hours of ‘practice’ is part of the equation make up that worlds best of the best. At some level all start-ups know this.

I was reading Good to Great the other day, for the 42nd time and was focusing on the flywheel analogy. To extrapolate and expand, creating a start-up is analogous to working with a very heavy and very large flywheel. It takes a lot of effort to begin moving the flywheel and if you are lucky, with enough serious effort and focus, it will finally make one revolution. The benefit in all of your hard work is a tiny tiny bit of momentum. If you keep pushing on the flywheel (IE. Reinvest) and focus on making a second revolution, it is still hard work, but it is a little easier than the first push and the flywheel moves a bit faster. The third revolution is easier than the second and so on. Fast forward to 1,000 revolutions and the flywheel is spinning so fast, that if a stranger came walking by and looked at this spinning flywheel, it would seem effortless to keep this flywheel moving.  The key is reinvesting.

Are there many other factors in becoming successful? Absolutely. Focus, execution, experience and luck are all basic, but too many times people listen to others tell them whatever they are doing will either never work or no one wants it – or worse, something more sexy comes along and temptation sways you to try something new.  Discouragement sets in and the cash-out approach takes over the reinvestment approach. Cashing out will always end up making you start over and prevent you from moving forward. The takeaway is to listen to the facts on the ground and as long as you see positive results, don’t listen to the noise and just keep pushing the flywheel. Reinvest the effort and time, take advantage of the compound principle and you will stop asking the question ‘will we ever see results?’  At some point, results will come – without question.



From → Observations

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: