Ch 2. The Miracle (and Disaster) of Compounding

Following on the theme of "Why home businesses don't work" I'm taking a look at what else the 3% do and the 97% do not.

Leverage or Compounding

Either word will do.  The principle remains the same.  You'll notice that I've used UK currency.  That's because I'm a Brit.  Change it to USD, or EUR, or any currency that suits you.  It's the number that matters, not the currency.

Take a 1p coin.  Invest it in a business with the intention to double it to 2p by end of day.  Tomorrow, take the 2p and repeat the process.  Keep doing it for the week, and you end up with 64p.  Nothing to write home about, but pretty darn good in the context.

Continue for a second week and you have £81.92 (do the math yourself if you don't believe me).  Am I boring you?  Stick with me, we're halfway down the runway and the pilot is pulling back on the stick.

End of third week you have £10,485 - that woke you up, didn't it?  And I've omitted the odd pence, for clarity.

End of week four?  £1,342,177 - do the math yourself.  Never take my word, or anyone else's word, for anything you read or hear or see.

Leverage/compounding is serious stuff.  Ignore it at your peril.  It's how PayDay loans work - they lend you £100 and you end up owing them £10,000 in pretty short order.  They ain't stoopid.  They rely on Joe Public being a complete plonker.

And - most critically - look at the difference between the person who gives up at end of week 2, and the one who stays just one more week.  More people give up because "it's not working" rather than stay to see it actually work.  They give up.  It doesn't fail.  They give up.  And they give up right at the moment that it is starting to work.  Isn't that the saddest thing?  It reminds me of something I read, donkey's years ago, about people who die of thirst in the desert.  Most of them die of thirst within 20 feet of water.  Same thing.

But let's get properly serious.  Doubling every day is NOT realistic.  But you SHOULD ALWAYS re-invest SOME of your profit back into growing the business.  A  common suggestion is a minimum of 20%, but - as you can see from the example above - the more you invest the faster you'll grow.

Let's look at a few examples, staying with the 1p example from earlier.  Do your own calcs to prove I'm not bluffing.  If the pace is too hot, change "week" to "month".  It'll still blow your mind.

Let's grow 20%
 - -  Wk1: £        2.99
 - -  Wk2: £      10.70
 - -  Wk3: £      38.34
 - -  Wk4: £     137.37

or 30%
 - -  Wk1: £        4.83
 - -  Wk2: £      30.29
 - -  Wk3: £    190.05
 - -  Wk4: £ 1,192.53

or 40%
 - -  Wk1: £        7.53
 - -  Wk2: £      79.37
 - -  Wk3: £    836.68
 - -  Wk4: £ 8,819.76

You get the picture?  Do you now see why 97% of startups fail?  Do you see how the 3% actually get their results?  And why those results are so spectacular.  I sincerely hope so.  Let me spell it out - it's hanging in there "ONE MORE"  whether that's one more day, one more week, or one more month.  It WILL take off.  Don't exit the plane halfway down the runway.

And this isn't just restricted to money.  It's the same when you are building a network or a team.  Very little happens in the early stages, so newbies give up.  They give up just before the rush.  That sudden and unexpected expansion that makes the business take off.  Well, I say "unexpected", but it isn't is it?  As you've just seen, it's totally EXPECTED!  It's expected because it is a simple mathematical process.

A Question

Let's see if we understand this properly.  There's a high school question that many high school kids get wrong. The question is this - a tiny weed falls into a large pond, where it doubles its size every day.  Over a period of 6 weeks it has grown enough to cover half the pond. How much longer will it take before it eventually covers the whole pond?

The answer is - 1 day.  It took 42 days slowly expanding, and still only half the pond covered.  Then - BAM - next day, whole pond.  It was half, it doubled, now whole.

That's what compounding is all about.  Hanging on in there just one more day.

Proper Thinking

Now do the sums again, but start with 2p instead of 1p.  No, I'm not going to do it for you.  But it will make you cry.  And yes - the answers ARE double the amounts shown.  So what if you start with 5p?  Or 10p?  Or a whole £1?  £5, perhaps, or ... (you get my drift, yes?).

Do you see why I set aside a cash lump sum to pile into my business?  Will this wipe the smile off the face of the whiner in the pub?

Just to be clear, I have no criticisms of pubs nor of their patrons, but here's a thought - it's not mine - it was said generations ago - I just nicked it:-

"The heights by great men reached and kept were not attained by sudden flight, but they while their companions slept, were toiling upward in the night."

Next article will be about where and how to put the time and effort.  We'll continue with the 3% vs 97% there too. Don't worry about the pretty flashing thingies below (all will be explained later).