The Compounding Stack
How's it going? What do you think of this series so far? I'd love to have your feedback, so feel free to reply to this email and let me know what you'd like to see. The following post is on compounding, which Albert Einstein once described as "the eighth wonder of the world"!
Raise your hand if you've ever seen a chart similar to the one below?
Yeah, me too. Pretty impressive, isn't it?
You probably let out a small gasp and told yourself that you would start tomorrow. Tomorrow comes and maybe you take action, maybe you don't. The longer you delay, the more likely you'll never get in the compounding game. And if you do get in, you could be severely limiting yourself by thinking that the above graph is the end all, be all. I'm here to tell you that it's not.
The chart is limited, because it assumes that compounding is limited to a traditional investment vehicle, when in fact there are a number of areas that compound considerably faster.
People: your personal network + your audience
Knowledge: information that you've incorporated into your thought process (or mental models)
Skills: unique abilities that make you valuable to others
All of these areas can grow at a considerably faster rate than traditional investing and often translate to high levels of monetary gain as well. Let's look at each of these:
If you were to look back on your life, how much of your success can be attributed to your relationships with others? 80%? 90%? 100%? We like to think of ourselves as self made, but reality is that we don't live in a vacuum and who's going to give us money if we did? The people you know are incredibly valuable and have the potential to help you achieve success at a rate much higher than the chart above. What does that look like?
A friend helps you get your foot in the door at a new company that increases your salary by 30%. Two years later, a co-worker helps you get a position in a different division for another 20% raise. You start using these raises to build equity through passive investing on money that wouldn't exist without the people you know. Over time, you get to know some pretty influential people and the sky is the limit from here.
You start a blog as a side hustle. At first, the audience is your 5 closest friends. Over time, they spread the word and 5 becomes 10 → 20 → 40 → 80 → 160 → 320 → 640 → 1280... Two years down the road, you clearly have an audience interested in a topic. You build a company to solve problems related to this topic and quit your 9 to 5.
I covered this in detail when discussing Divergence & Convergence. Think through what information you should be focusing on right now that will maximize the compounding effect. I've focused my business on helping clients develop knowledge in personal finance & knowledge management (PKM) because it's an incredible foundation for a compounding stack that will lead to long term success.
What skills do you possess today? What tweaks can you make to your skillset that will increase your unique value to your current (and future) company or client? The internet has made it incredibly easy to learn new skills without having to go back to school. There are millions of YouTube videos, courses, certifications that can vastly increase your value to a company. Not only that, these new skills could be the building block for a life of entrepreneurship or career change.
Process Over Product
I work with my clients to build a compounding stack that is driven by process rather than product. Often, the stack will include some form of traditional investing, but for certain clients it may not be necessary at all.
Why process? A natural byproduct of the compounding phenomena is that entire industries have developed products to interface with your compounding stack. The idea is that if you purchase these products, you will gain access to the compounding effect passively. Great in theory, but it can be quite costly over the long term. If the product has set the rules to benefit from your personal compounding, it will take its cut first, which means those offering the product must add value in excess of the compounding chart just to break even. By emphasizing process over product, we set the rules for the key compounders in life and ensure that we are the first to benefit from our personal compounding stack.
Layering the Process
So is there an optimal order to this compounding stack? I’ve found the below order to be a good mix.
1. Knowledge: You cannot focus if you don't translate information into knowledge. Start with a basic financial education and assessment of your core values, so that you can quickly move on to Step 2. Don't wait for an advanced education! Your knowledge will continue to compound over time, so you can incorporate new discoveries as you go.
2. Money: Traditional investment advice has merit. The power of compounding money is real. Get started early, because early on in your career, time is your friend, but it quickly becomes your enemy. If you rely on product for the compounding effect, ensure that the value provided is outweighing the cost. Adding this level of value is incredibly difficult to do! If you'd like to learn more about moving to a process based stack, setup an Ignite Session with me.
3. People: Use the knowledge that you've gained to start having conversations with your network and figuring out what changes you'd like to see in your life. You want to have a vision of where you want to go long before you have the money to make it happen. Those around you may have ideas that drive your curiosity forward and the connections to make a dream a reality.
4. Skills: Now that you have the vision for where you are headed, start building the skills necessary to make you a valuable contributor to that space. The beautiful thing about the internet is that you can generate proof of work for an incredibly low cost and start getting feedback as to how your ideas are benefiting your customer base. If the feedback is that you are lacking in an area, you can turn around and improve that skill or gain leverage by using a low cost service that will do it for you.
That's it for today. No two people's compounding stack will look the same and the journey to build that stack is a creative endeavor. I'll be back in a couple of days with my last topic for this series....Time!