I have this fantasy of myself giving a Ted talk on success. I open my talk by saying, “The secret to success is to be really successful early on.” Then I walk off the stage.
It makes me laugh, but it’s true. Advantages and disadvantages tend to accumulate. The rich do get richer.
On the surface, it’s a worthless insight. Who wouldn’t choose early success if they could?
However, there is utility in having a deep understanding of this idea because it provides a more powerful paradigm for long term decisions.
The Left Sided Lesson of Compound Interest
I remember taking a personal finance class in high school. My teacher emphasized to us the power of compound interest. The punchline was that small amounts of money invested early eventually become enormous. He implored us to start saving ASAP as the longest time horizon led to the greatest returns.
It’s a powerful lesson- but that’s not all I took from it.
If you look at the trajectory of the compound interest, you’ll notice that there is a long tail of not much happening and then an acceleration of growth.
It’s an 80/20 distribution, where most of the growth occurs after that tipping point. E.g. in the graph above, the first 5 years nets $1,700, the next 5 years nets $7,300.
As a high schooler, I asked my teacher, “Why not just put in a larger amount that is equal to the amount where the returns begin to grow exponentially?”
He smiled at me, “Because you don’t have the money.”
Snowballs
When you’re rolling a snowball for a snowman, your ball starts small and stays small for a long time. Once you hit a threshold in surface area though, it begins to grow exponentially more quickly.
Similar to our compound interest graph, the first five minutes gets you a small snowball, the next five a rolling boulder.
The problem is that you don’t start with a snowball the size of your hand. You start with nothing.
Common Wisdom Laziness
“The best time to plant a tree is twenty years ago. The next best time is today.”
Common wisdom on this subject is that you need to apply your efforts over time, starting now. Start investing your paper route money. Start rolling that snowball.
It’s a lazy answer, focused on what’s immediately available.
Rather than plant a tree today, why not buy a sapling from someone who planted a tree ten years ago?
Hack the Left Side
For environments without high variability, it’s hugely advantageous to devise a way to jumpstart your entry rather than begin with nothing.
That can meet a lot of things. For business, it might mean:
- Using debt or savings to fund rapid initial growth through marketing and sales.
- Partnering with people who have already slogged it out. Even when you give up equity, the math is often still much better (e.g. 100% of a 10% profit of $100 = $10. 50% of a 10% profit of $700 = $35.)
- Learning from competitors’ tactics and/or history.
- Acquiring other businesses (even for those who can’t get loans, owner financing is an option.)
- Hiring a contractor or employee to execute a task rather than going through the learning curve.
The key to all this is to do whatever you can to avoid the left hand side of the growth curve.
That might mean taking risks or making sacrifices- but it’s worth it.
What Prevents Rapid Growth
With some activities, you can’t circumvent the initial investment. There is no way to buy the first five years of experience in learning the piano.
But it’s a mistake to think that all investments are like this.
In our abundant environment, the ability to leap ahead in growth isn’t often limited by hard constraints. More often, the limit has to do with the edges of our creativity and courage.
So where are your limits?
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Featured image is Dionysus being born as a baby from Zeus’s thigh. Photo from Key Mayer: https://www.flickr.com/photos/ken_mayer/29654736143 Used under Creative Commons 2.0 : https://creativecommons.org/licenses/by/2.0/
The graph above is used under the Creative Commons Attribution-Share Alike 3.0 Unported license. It was sourced here: https://commons.wikimedia.org/wiki/File:Compound_Interest_with_Varying_Frequencies.svg and created by the user: https://commons.wikimedia.org/wiki/User:Jelson25