Success, compound interest, the tortoise and the hare

March 8, 2016 by ramblingsofanextrememan 5 Comments

I’m from a small country town called Bairnsdale in south eastern Australia. I was once asked to provide some information about myself and some inspirational words by a friend to motivate children she works with back home and impart on them some life lessons. While I didn’t end up giving her what she asked at the time due to being extremely remote, I’ve had some time to think about this topic and this is what I’d like to say.

I’d like to talk about two important themes that apply to life.

The first is compound interest. Compound interest is something that anyone can harness. Compound interest is a super power.

The second is the story of the tortoise and the hare. The lesson learnt from this children’s story is invaluable, life is not a short race, but a long one.

I’d like to talk about these 2 themes over 3 topics:

1. Money
2. Wisdom
3. Fitness

I’ll also make some recommendations in each of these topics about where you can learn what I think are some good tools to assist you in each of these topics.

Compound interest and money:

The power of compound interest in saving money is well known. Warren Buffett once said that he doesn’t think of spending $30,000 on a car as spending only $30,000. He instead thinks of spending $30,000 on a car as spending what could turn into a million dollars over 50 years, if you invested the money instead. Would you pay a million dollars worth of your retirement savings for a $30,000 new car? If you borrow money for that car, you often end up paying in the vicinity of double the purchase price (depending on how long it takes you to pay it off and the interest rate) this makes the potential million dollars that you lose at retirement even more… Here is what a the purchase price of a $30,000 car can cost you in loss of retirement savings in 50 years if you instead invested that same money. I’ve provided some different interest rates for comparison.

Of course there are many options for achieving different rates of return, interest rates are currently the lowest they’ve ever been in Australia. You can currently receive approximately a 4% return in a bank, but over a 50 year time frame I would assume this would increase to the long run average. You could also seek other investments which may pay a higher rate than the interest you may earn in a bank account.

As for recommendations:

The best book I have ever read on the topic of personal finance was given to me by a client who was retiring in his 50s. His name is Phil. I had a progress meeting with Phil in the last week of his employment and he didn’t want to talk about progress at all, he wanted to talk about life and his retirement (he was planning to sail around the world for the foreseeable future). He gave me a book called Your money or your life. Thank you Phil.

Before any investment decisions are made I strongly recommend reading The Intelligent Investor by Benjamin Graham. No one in any circumstances should buy any asset unless they know the difference between price and value. This applies to any asset considered for investment, shares, houses, business etc.

To have an idea of what the future may hold you need to know what happened in the past. I highly recommend a great book on financial history, Manias, Panics and Crashes a history of financial crisis.

 

Compound interest, the tortoise and the hare and wisdom:

While the affects of compound interest and money are well known and easy to prove with a simple spreadsheet, I propose that the power of compound interest can be harnessed in other areas of life.

But first I’d like to talk a little about the story of the tortoise and the hare.

The story of the tortoise and the hare, if you’re unfamiliar is about a cocky hare who is quite a fast runner. The hare is always teasing the tortoise about how slow he is, until one day the tortoise challenges the hare to a race.

The hare is obviously quite confident of beating the tortoise due to his greater natural ability. When the race starts he soon leaves the tortoise behind. Due to his over confidence, once he’s sufficiently far in front he decides to have a nap under a tree.

When the hare wakes he finds that the tortoise has passed him and is crossing the finishing line.

This story relates very strongly to life.

In the race of life people often start out fast. Take for example learning, children start out strong, they are mandated by the government to attend school from the ages of 5 until at least 16. Some people go onto University during which they may continue to learn in a structured environment until their early 20s.

For the majority, once they hit their early twenties and have whatever qualification they require for their chosen profession, think they are far enough out in front in a learning sense and stop to have a nap under a tree.

For the majority, once the mandated or structured learning has stopped they stop learning.

But life is a long race.

The difference between the tortoise and the hare can be explained by how Warren Buffett and Bill Gates both answered a question they were once asked at a dinner party. They were asked what was the secret to their success. They both gave the same one word answer; “Focus”. The tortoise has an abundance of focus, while the hare does not.

Now you may say, that’s all fine and well for a tortoise and a hare running a race, but when it comes to learning things, I’m not that smart. I’m not smart enough to learn complicated things. To that I would say that I strongly believe that any person can learn anything that they want to learn.

While it is true that some people have higher aptitude than other people, everyone is capable of learning what ever they would like. Some people may know more than others and hence be considered “smarter”, this is only because they have learnt more things.

The only difference in raw thinking power between people is aptitude, and aptitude is only a measure of the speed with which a person may learn something. Everything else to do with “smartness”, knowledge, logic, problem solving etc. is a learned skill. If someone with a lower aptitude wants to learn complex skills they can, the only difference is it may take longer than someone with a higher aptitude.

But the thing about life is we all have a lot of time.

No one needs to be truly successful in 1 week, or 1 month or 1 year. Life is a long race. If you really want to learn something and have focus you will find that you have a glut of time. And if you couple this with the observation that the majority of people decide to stop learning after they achieve their required qualification you have plenty of time to plod past them while they are asleep under a tree.

One other point I’d like to make is the difference between IQ or natural talent and rationality. To borrow an analogy from Warren Buffett. Consider a car, he describes IQ and natural talent as the power of the car engine. He then describes someone’s rationality as the drive train of the car, the gear box, the axles, the tyres. If you have a very powerful engine, high IQ,  high aptitude, an abundance of natural talent, but are not rational you have a weak drive train and cannot get the power to the ground. In other words, if you are the hare, have great natural talent for running, but are lazy and irrational, you will quite easily be beaten by someone with a lesser natural talent and greater rationality.

So I’ve applied the story of the tortoise and the hare to learning, now let me discuss how I believe compound interest can affect learning.

To do this, I’d like to borrow something from Charlie Munger and talk about mental models.

Mental models are concepts that assist our understanding about how something in the world works. Mental models are normally developed or proposed within certain discrete academic disciplines. For example there are mental models for mathematics, engineering, physics, business, psychology. But mental models can often apply across disciplines.

Take for example the mental model of critical mass. Critical mass refers to a concept in nuclear physics. If a nuclear fission reaction happens at a fast enough rate it changes from being sub critical, (in which the reaction will dissipate due to it’s own energy) to being super critical where the reaction begins a self sustaining chain reaction which gets bigger and bigger and bigger.

The mental model of critical mass can also be applied to other disciplines. Take for example viral videos on the internet. If the viewing of a video hits a certain rate it changes from sub critical in which interest will soon die off, to super critical in which it starts a chain reaction of people showing it to their friends, and their friends and so on in an exponential fashion.

Can’t hug every cat

Now from learning the mental model for critical mass you have in fact learnt a mental model that will explain two phenomena. Learning one thing has assisted you to understand two things. Through learning  mental models from different disciplines and applying them where they fit, the return you get from learning any one thing becomes non linear. This is the superpower of compound interest applied to wisdom.

So to reiterate; if you are the tortoise and you stick at learning over a life time you are sure to have some impressive results.

Some recommendations:

A book called Seeking Wisdom, from Darwin to Munger.

The Farnam Street blog is written by Shane Parrish who reads a hell of a lot and shares the things he has learned. He offers great recommendations upon what to read and compiles lists of the favourite books of some very smart people. I can’t recommend this blog enough.

A speech given by Charlie Munger called, The Psychology of Human Misjudgement

Here are two quite relevant quotes from Charlie Munger:

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time–none, zero. You’d be amazed at how much Warren reads–and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

“I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It’s way better than just being given the basic concepts.”

 

Compound interest, the tortoise and the hare and fitness:

I apologise for the length of the previous section. That may have been somewhat over the top. Now I’d like to talk about a lighter topic; fitness.

In much the same way that the majority of people learn fast in their youth and then stop learning once they have achieved their required level of qualification, the majority of people do the same with fitness. Children are naturally fit and active. They play games, team sports, swim, cycle, climb trees etc. Then at some stage the team sport stops. People hit their mid twenties and stop exercising (unless they are required to be fit for their occupation). They have a nap under a tree.

Many of the hares of the world, those who were naturally fit in high school are fat and unfit by their 30s, while in some cases those who weren’t the star athletes of their high school; the tortoises, continued to plod on with consistency and get fitter and fitter.

I think the description of the tortoise and the hare for fitness is quite appropriate.

But I would like to talk about compound interest and fitness.

One form of exercise that I have found quite relevant to the compound interest analogy is strength training using your body weight.

Using an appropriate training regime you will of course get stronger. If you decide for example to do 10 push ups a day it will get easier to do 10 pushups. Then through progression you do 20 pushups a day. At some stage the number of push ups you can do will plateau, due to the law of diminishing returns.

At this point, you will say, that doesn’t sound like compound interest!

But at that point you should increase the difficulty of the exercise. You advance to doing one handed push ups on an bench at chest height, then at some stage you are doing one handed push ups on the floor. The same can be done for pull exercises, leg exercises etc.

The number of muscles you are using, the number of calories you are burning, the flexibility and balance you are gaining from each exercise increases as the difficulty of the exercise increases. So as you move to a harder exercise you are getting more benefit for the same number of repetitions. If you do 20 two-legged body weight squats, and then try and do 20 pistol squats you will know what I mean.

Ok, so you may not see true exponential behaviour, so maybe the compound interest analogy for fitness may not be entirely accurate. Perhaps if you compare your relative fitness performance in your age group it is a better analogy, but perhaps not.

But in any case the tortoise and the hare is quite accurate, and relevant to fitness.

Some recommendations:

The only recommendation I have to make is You are your own gym, the bible of body weight exercises by Mark Lauren. I’ve done all kinds of exercise in my life, and this is the most balanced, time efficient and portable exercise routine I’ve ever seen. Using this program, progression is almost limitless.

There is also a You are Your own Gym app for Android and iPhone. The app is sensational, with some basic equipment such as a chair, a door, a table, or even a ratchet strap and some handles you can increase your fitness and strength dramatically in a very time efficient manner.

 

So that concludes the longest and most serious post I’ve ever written. If after that you feel you need some less serious discussion, I recommend this and this.

Thank you for reading.