Compounding: A Major Key To Success

It was uncanny, thought Shmiel Rothenberg. His friend Rafi always had everything going for him. More than that, Rafi’s success seemed to come effortlessly. Family. Torah. Business. Chessed projects. Friends. Health. Of course, you never knew for sure, but Shmiel was pretty close to Rafi, and his excellent fortune seemed genuine. He knew that Hashem controls everything; we are all living intricately planned lives where an interplay of zechusim, mazal, and tefillah unfold.

But is there some common thread or catalyst to success? Could Shmiel perhaps learn some hishtadlus principle that could help him improve his own lot?

Success Snowballs

I know the scenario presented above sounds like a tall tale or the introduction to a cheesy novel. But bear with me. Chazal offer multiple sayings and anecdotes discussing success, providing both an explanation and a potential path for improving one’s fortunes. And it seems to me that compounding, whereby initial growth and success draw on itself to attract further growth and success, is a key theme. People seeking to better themselves have to take the first steps in the right direction. Then, as value is created and good habits build, success begins to snowball, building on itself.

Compounding Money

The most basic example of the power of compounding is in the growth of invested money. Earning interest on your interest is the key to successful investing. Without compounding, $1,000 earning 10% triples an investment over 20 years ($1,000 + [20 x $100] = $3,000). The same investment accruing compound interest grows over sevenfold ($1,000 x 10% compounded for 20 years = $7,389). In year 20 alone, the compound investor will get over $700 in interest versus the simple interest of just $100. This “miraculous” earning potential ($734 on an initial investment of just $1,000), is the natural result of patient investing.

Compounding Customers

But compounding has an important effect on almost all aspects of our lives. It is well known, for example, that the rate of failure of startup businesses is very high. One major reason for this is that new companies initially lack customer referrals. An established operation can rely on word of mouth to generate most of its customer base, which tends to compound over time. In year two of a business, 10 previously satisfied clients bring in another 10. In year three, those 20 satisfied clients (10 + 10) can bring another 20. By year 10, referred and repeat clients may be rolling in faster than the established company can handle them, while a new competing business is struggling to find its first 10 clients.

Compounding Business Relationships

The same phenomenon often occurs with business opportunities. As people advance in their careers, their industry contacts and business opportunities tend to compound too. They hear about more potential deals or job openings and have the trusted network to bring in investors and partners required for more complicated but lucrative situations. Consider a promising but fledgling business seeking a financial or operating partner. It is much more likely to offer this opportunity to someone who already has a track record of success. The prior achievements then keep compounding into larger and greater new ones.

Compounding Knowledge

Every step in my career, from real estate management to real estate investment to manager of an institutional investment fund and real estate operation to 401(k) specialist (and financial columnist, of course), has built upon the prior structure of experience and know-how. Therefore, the advice I give today, b’ezras Hashem, is much more sophisticated and valuable than what I dispensed 20 years ago. My career path is somewhat unique, but this general compounding of knowledge is standard for all lifelong “students”. This compounding effect partially explains why older people often have more creative perspectives than youngsters even though their brains may process more slowly as they mature.

Compounding Good Habits

Compounding applies to many other aspects of life as well. For example, when someone eats right, sleeps right, exercises, and has solid interpersonal relationships, each aspect strengthens the others. You can sleep well because you didn’t overeat. Because you slept well, you don’t feel sluggish, so you won’t overeat. Because you’re in good health, you can exercise, which leads to further good health. When you feel well, it’s much easier to be in a good mood and have good relationships. Having good relationships also helps put you in a good mood. It’s all circular, and it all tends to compound and accelerate.

The Reverse Effect

Compounding is clearly a very powerful force, and like everything else in this world, it can be used for good or bad. Paying high credit card interest is so financially damaging because it’s negative compounding—the opposite of a great investment. A business that burns a few customers annually can find its reputation totally ruined as word spreads. Getting sucked into a bad deal with a disreputable partner can harm further business opportunities. Filling your brain with narishkeit rots its capabilities. Bad personal habits feed and accelerate each other. “U’vacharta vachaim”—we all have to choose in which direction we want our life to go, and it all begins with the initial, small choices.

Flywheels for This World and the Next

One of the most successful users of the compounding effect is Jeff Bezos, founder of Amazon. A compounding “flywheel” effect is the core strategy upon which he built an unparalleled economic empire. (See the graph, which deserves an article onto itself.) As is always the case, the kernel of chochmah Bezos applied so effectively in modern times is spoken of in the Torah. The compounding effect is mentioned in multiple ma’amarei Chazal, showing how the rich get richer and the poor get poorer. The most important compounding effect is, of course, in ruchniyus matters: “Mitzvah goreres mitzvah—One mitzvah leads to another.” With the power of ruchniyus compounding, you can build a mitzvah empire!


Want to dig deeper?

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Mental Illusions: When Your Brain Tricks You into Losing Money

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