I Wish I Had Known: Don’t Underestimate Compounding In EVERYTHING

First: did you help me out yesterday by giving some feedback and ideas about things YOU wish you had known when you went off to University/College? If not, go here! Now, on to the post.

This was a good one, and it will be the first one I didn’t come up with – credit goes out to Andrew Markham for pointing out this tidbit of wisdom – and it resonates with me as much as anyone.

If you are unfamiliar with compounding, let me explain it in general non-financial terms: compounding is when one activity increases the return on the next, which then in turn increases the return on the next, and such and on so forth. The increased return can take many forms – quicker, cheaper, better, etc. – all that matters is the previous task adds value to the next task – and that is the basic idea of compounding.

You might also call it momentum, network effects, habits, whatever – they all mean the same thing: the idea of compounding return.

I Thought Every Activity Was Isolated

When you first start school, you’re young (I was 17 when I moved in to my residence) and see the world as a very disconnected series of events – at least I did. I thought very few activities were interconnected, and one thing rarely affected another. It’s hard to have a high level view of your life, because you have only barely started living it – everything seems to come at you one by one as separate events.

Then you get that first bad mark, or miss that first club meeting. You shrug it off – after all, you can start studying or getting involved whenever you want, it just doesn’t have to be right now. It was because I didn’t see the long term value in it – how going to that one meeting would lead to another meeting, which would lead to something else, then something else. The same thing goes for studying – doing poorly in one course will not just affect that course, it will affect everything; it might hurt your ambition, you may miss out on a great group opportunity, or develop a reputation for poor work – it will affect your psyche.

That is why I thought my economics mark was unrelated to my business mark – they were two separate courses, with two separate efforts required – there was no relationship between the two. If I chose, I could get an A in business and a C in economics, it really depended on what mattered to me, and what I wanted to put effort in to. The problem is, this kind of a view is contagious – it starts to permeate everything – I could exercise one week and not another, I could join a campus club this year or next – it didn’t really matter to me, it was on my schedule.

What I learned is that if you decide to go to the gym today, it makes it easier to go tomorrow – and not only is it easier, you will get more out of it. So that led me to my key understanding…

I Learned Everything Compounds

What I learned was that everything compounds. I spent the first year largely ‘getting by’ and wasting time on a lot of other useless activities – movies, games, going out, etc. There were a couple reasons why things turned out that way (I largely thought I was too smart for the first year courses) but that was rooted in a deeper belief: I can start applying myself to the course work whenever I want (correct in principle, wrong in practice).

What I experienced was being on the other side of compounding – the side that missed out. Let’s take academics as an example. What you will find is that by your second year, the students who have put in the academic legwork in their first year are already reaping the rewards. They have developed networks of other students, formed study groups, work on projects together, and share notes. By putting in effort to a prior course that on a surface level was unrelated, they have made future courses easier – they are on the right side of compounding.

Take another example – internships. Internships are one of the most important assets to walk away from University/College with – if you can get a couple solid internship experiences under your belt, it will make your post education job search infinitely easier. Internships are also perhaps one of the best examples of compounding return – once you get one good internship, it makes it MUCH easier to get another good one the next year. On the converse side of that situation, if you fail to get an internship (or at least a decent one), it makes getting a better one the following year MUCH harder – not only because you don’t have great experience, but because someone else does!

When I started getting involved on campus in second year, it was a slow start. I joined XLerate, a first year business club. There I started doing Web Design (an early skill), then went on to do Sponsorship. Then other doors started opening up at a faster rate – SBESS, PRISM, Debate, you name it – it all has a watershed event, and it all gets easier along the way.

The other great lesson here is that just as compounding can work for you, it can just as powerfully work against you – think of how many people have been sunk by credit card debt. If you don’t get involved in first or second year, it will make it that much harder to get involved in third year. If you have an 8.0 GPA, it will make it that much harder to finish with a 10.0 (trust me, I tried!). However, once you get on the right side of compounding, it becomes much easier to maintain the momentum.

Most Important Lesson: Get a Strong Start in First Year

The best insight into the whole process of compounding: it’s not how you finish, but how you start. How you finish is determined in part by you, but also largely by factors beyond your control – the competition, other people, etc. How you start is 100% within your control. If you start strong, layout good practices, and develop fruitful habits, you can set yourself up for a much easier journey.

In practical terms, this means exploring your options in the first year; get out there and see what you can do, some ideas:

  • check with the careers office to look at internship opportunities BEFORE you need to apply for them
  • get involved on campus – you will meet some of the best people there (I learned that first hand)
  • start out strong – it’s much easier to hold steady then it is to ramp up

Put a little effort into getting on the right side of compounding, and it will allow you to build momentum – get into the habit of leaving things till next week, month or year, and you will find yourself on the wrong side of it.

If I Could Go Back I Would Have Started with Better Momentum

If I could go back, I would have gotten a much better start first year. Having a slower start the first year hurt me in a couple of ways.

Firstly, it made getting back up to speed MUCH more work. Think about saving for retirement. If your goal is to have $1,000,000 saved by age 60, and you want to start saving at 25, that is very realistic. If you wait until you’re 45 to start, it’s not that you won’t be able to do it – you can still meet your goal by all means – it will just be a LOT harder.

That was my situation in second year. I knew where I wanted to be, and I knew where I was at the time, so getting to where I wanted to go was much more work than it might have been if I started in first year.

Secondly, it cost me. It cost me in opportunities, relationships and potential. Who knows what different avenues I might have explored if I had been on track, momentum behind me – but the harsh reality was that I couldn’t – I had to focus on getting back to even.

By building a strong foundation in your first year to launch off of, everything becomes so much easier. Compounding is one of the most powerful forces – you just need to make sure you are on the right side of it.

The final powerful lesson is that this process doesn’t stop when you graduate university – if anything, it becomes more important than ever. The pool of individuals grows, the opportunities grow, and the stakes go up – you are playing for real money now. Start to establish good habits: network aggressively, stay in touch, save, and take risks – you don’t want to realize in a decade from now that you have been on the wrong side of compounding for ten years!

Blair Livingston


7 thoughts on “I Wish I Had Known: Don’t Underestimate Compounding In EVERYTHING

  1. Pingback: I Wish I Had Known: Get On-line ASAP, It’s a Huge Asset « blairlivingston

  2. Great post. I have one going off to college in the fall. I know she will do great, but always good to hear words of advice from someone who has been in her shoes. Thanks for sharing!

    • Thanks for the feedback! I am actually in the process of writing a book (very in depth) about my experiences at College, what I would do differently if I could go back, what I wish I had known, how to get internships/summer jobs, etc. etc. – I’m going to be selling copies in early August through kick-starter (something like $5 – I am doing it because I passionately want to share my thoughts – not for the money!), I wrote a post a couple days ago outlining the table of contents, would love to hear some feedback on it, and let me know if you are interested and I will shoot you a reminder in August when it goes live!

  3. Pingback: Finance blogger wisdom: changed thinking | Abnormal Returns

  4. Pingback: Top clicks this week on Abnormal Returns | Abnormal Returns

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s