The concept of compounding interest has been one that I have understood intellectually for a while, and I think a lot of people get the basic premise these days. When I was in my early twenties, I traded on various financial markets for two years. My mentors would always be preaching the power of compounding interest and why I was lucky to have come across it at a young age. However, it is only recently that I’ve started to seek more opportunities to apply it actively in my life again.
It seems fortuitous then that I should stumble across an HBO documentary about Warren Buffet on the in-flight entertainment system during my flight to Sydney this weekend. Warren Buffet is probably the biggest proponent of compounding interest in today’s day and age, and the documentary got me thinking…
I didn’t know it at the time, but the first time I was exposed to the concept was through a story my dad told me when he was teaching me how to play chess when I was seven or eight years old. The story was of a Sultan who lived in a Kingdom and had a worker who invented the game of chess to entertain him. The Sultan fell in love with the game and was prepared to offer any form of payment to the loyal worker as a reward. The worker, being able to choose any prize in the Kingdom, asked to be paid in grains – one grain to represent the first tile on a chess board, then double the amount of grain on every subsequent tile. The second tile, therefore, would have two grains, the third four, the fourth eight and so on. Feeling this was such a trivial reward, the Sultan agreed, and before he realised what 2 to the power of 64 was, he was giving away the whole Kingdom as there weren’t enough grains available before he reached the last tile.
Doubling rice on every tile quickly adds up!
In a real-world situation, you might be 20 years old, deciding to invest $5,000 every year and get a 10 percent annual return. Do this every year, and by the time you are 60 years old, you have turned $200,000 of total investment into $2.4 million – not bad! The urgency comes when you realise that if you had delayed starting until you were 30, the total funds in your account would only reach $900,000. So, every day that you delay, you are missing out on significant returns in the long run. Once you start, you have to make sure you are choosing the right investments and monitoring your position along the way too.
As Warren says, “it’s a simple concept that over time can bring extraordinary results”. Even Einstein said that “compounding interest is the eighth wonder of the world”.
But what if we applied this theory to other aspects of life, such as running high-performing teams and organisations? What kind of results would this bring?
People these days, especially millennials, are inherently making decisions to make sure that the work they do is “fulfilling and makes a difference”. Whether it is building a reputation for feeding their egos, having a great work-life balance, or solving world hunger, ultimately “making a difference” is in itself a self-serving concept. So how do leaders, who are also driving results for their own agendas, leverage people to build great teams or organisations?
If we genuinely focus on training and developing five people in our team to be brilliant at not only what they do, but also inspire excitement and motivation to achieve their own goals and aspirations (career progression, learning, personal goals), then in due course, they will train and develop five people each paying it forward, lead by your example. You will have 25 people who are inspired and ready to take charge of their careers and lives. What then if each of those 25 train another five people?
What I have observed is that companies seem to find it counter-intuitive to focus on developing and training employees first. Most companies focus on money-pinching decisions to drive up the bottom-line instead and this is precisely the belief that needs to be turned on its head.
Developing your team and focusing on their personal goals and personal development (underpinned by an aspirational company vision) creates an electric culture and engaged people who are actively promoting the organisation and regularly providing ideas for improvement. This excitement and good service seep into dealings with customers, who in turn become engaged, eventually driving up the bottom-line in a far more powerful, robust and sustainable way.
As Warren says, “it’s a simple concept that over time can bring extraordinary results”. Even Einstein said that “compounding interest is the eighth wonder of the world”.
But what if we applied this theory to other aspects of life, such as running high-performing teams and organisations? What kind of results would this bring?
However, just like in the story of the Sultan, we have to start on the first chess tile with one grain first, and just like investing in financial markets, we have to choose the right investments (people) along the way that will bring a return. We also have to continually monitor and review progress with our time and energy, to make sure everything is on track to cultivate the desired result. As the story goes, the sooner we start, the bigger the compound effect down the line.
One of my favourite anecdotes is when the CFO asks the CEO
“What if we spend all this money and invest in our people and they end up leaving?”
To which the CEO responds,
“What if we don’t and they stay?”
In what other areas of life can we apply the principles of compounding interest? Client interaction? With our family and friends perhaps? Or in educating the next generation?