211. the Boring and the Painful variable (Compounding)
“Most great fortunes are built slowly. They are based on the principle of compound interest, what Albert Einstein called, “The greatest power in the universe.”” — Brian Tracy
In the third edition of this short series on Compounding, I explore the most boring and perhaps painful variable in the equation for compounding — “n”, the number of compounding periods or, in other words, your time horizon.
Here and now
From research done on animal cognition and more particularly on animal’s perception of time, it seems like animals have a limited conception of time (specifically, passing of time). They certainly do seem to have circadian rhythms and, in that sense, they are quite attuned to being able to do things timely but they seem to miss the idea of past and future. They seem to be always stuck in the present moment. As humans, we, of course, have a strong and consistent conception of the passage of time. In fact, most of our issues seem to stem from this ability — as opposed to being completely present in the moment, we are constantly tormented by the regrets of the past and anxieties about the future. On the flip side, we are also able to bring up, at will, pleasant memories from the past and are buoyed by anticipation of a promising future. Animals seem to react instinctively to their biological and their environmental state. For example, nocturnal animals recognize that it is time to go hunting on the basis of external stimulus of sunlight fading away. As another example, as a reaction to their internal (biological) state of hormones, dogs realize that it is time for a meal. For the context of this article, the most important implication of this nature of animals is that they are concerned with the requirements of the present moment. They do not concern themselves with thoughts on how to satisfy future needs.
“Be careful not to compromise what you want most for what you want now.” — Zig Ziglar
We, human beings, are essentially animals too. We became hunter gatherers only about a couple of million years ago. Only in the last ten-twenty thousand years or so, we seem to have settled into pastoral and farm-based living. Given that life on earth began well over 3.5 billion years ago, from an evolutionary perspective, we have been exclusively humans for a very, very short time. No wonder, like animals, we are also compelled by our immediate needs primarily. We do not yet have a well-developed intuitive sense of future needs. We, of course, understand and parrot our expected future needs — many of us are constantly hassled with future obligations like buying a house, sending our children to college or retiring. What betrays our lack of intuitive sense for future needs is our lack of appropriate actions regarding saving for the future versus ease of consuming for the present. We mostly cater to our current needs; we struggle to sacrifice the present for the future. Why do we eat junk food or sacrifice sleep, knowing full well that it will negatively affect our health in the future! Long shadow of evolution hangs rather resolutely on our heads. We are essentially animals who are yet to transition properly into humans who have to tend for our future. Our fundamental preoccupation continues to be immediate consumption and perhaps, it will continue this way for a (long) while.
Endurance is hard, very hard
“Patience is not just about waiting. It’s about keeping a good attitude while waiting.” — Joyce Meyer
Every human being is unique. Not all human beings have trouble understanding the need to sacrifice some amount of present consumption for securing future needs. Those few have no trouble going beyond making fashionable statements about tending to their future. They are able to sacrifice some of present consumption. They are OK to skip that web series on OTT platform for sleep. They muster mental strength to not give into the irresistible temptation of a delicious dessert. Heck, they even wake up early in the mornings and go running or walking.
“Consistency and patience are crucial. Most investors are their own worst enemies. Endurance enables compounding.” — Seth Klarman
But for how long? For a week? a month? A year? Postponing consumption is hard as it is, but doing it on a sustained basis is very hard. It is somewhat like that special property of our universe called “entropy”. Law of entropy assures that things constantly get chaotic with time. Maintaining order requires relentless effort. Order just cannot stand on its own. It degenerates. Enduring the denial of material pleasures is not easy, it is very hard. Nature seems to have built life in such a way that only a few basic rules apply: avoid starvation, procreate and be safe & secure. In the animal world, these are difficult to implement. Food is always in short supply; one is almost never fully safe from predators or elements of nature and mates are not easy to find. So, it seems like the default bias in animals, including humans, is to overdo on these fronts where possible and, importantly here, surely not to underdo. No doubt humans can’t resist any of these urges.
Bottomline
“Time is your friend; impulse is your enemy.” — John C. Bogle
Great results take a long time to compound but we are not built for waiting and enduring. It is just not in our natural temperament to wait for results. We find waiting boring and painful. We instead crave excitement; we like heroes and heroic actions. Only if one could keep up with the tedium of doing small, value adding actions over a long period of time, extraordinary achievement could be easily within our grasp.
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