If it’s one thing I’ve learned about successful investing, it is this: stick to your long-term investing plan and don’t let your emotions get in the way.
The worst thing you can ever do is to either give up, sell out or think you can do better than the compound effect. All three actions are essentially driven by emotions (not logic) — impatience, fear and greed. All three are killers of the compound effect. And this is exactly what I intend to expose in this article.
Note: If you are new to investing and clueless about how the compound effect works on money, do read my previous article, The Compound Effect: Supercharge Your Wealth to Abundance before diving into this one.
Here’s what I’ll be covering:
- The Flooding Stadium Story
- The Three Stages of the Compound Effect
- Keep Calm and Let Your Wealth Compound
1. The Flooding Stadium Story
To discover the connection between emotions and the compound effect, the best place to start is to realise how the compound effect truly feels like.
Probably the best example I can give is the “Flooding Stadium” story that has been floating around on the Internet for years. It’s one of my favourite examples of the compound effect and it goes something like this.
Imagine you are sitting at the highest row of the bleachers looking down at the field of a football stadium. Now, imagine that the entire stadium is completely water-tight, like an empty, gigantic swimming pool.
You glance at the stadium’s clock and it’s exactly noon time when you notice a single rain drop falling from the sky, landing right smack in the centre of the field (yes, you have binocular vision).
One minute later at 12:01 PM, two rain drops fall concurrently on the same spot. Another minute passes and at 12:02 PM, four rain drops fall at the same time. The next minute, eight rain drops fall and it continues in this fashion, i.e. the rain drops double every minute.
The water doesn’t get absorbed into the field, but begins ponding.
The question: How much time do you have before the water level reaches your seat?
In other words, at what time would the entire stadium be completely flooded with water? Before you read on, think about it for a bit. Starting with just one drop of water at 12:00 PM, will it take minutes, hours, days or maybe even months to fill the entire stadium?
You have your answer in mind? Ok, let’s continue with the story.
With every minute that passes, you continue to watch as the water slowly accumulates from a tiny puddle into a shallow pond that begins to cover the stadium grounds.
You become restless and grumble: I should go grab lunch now… this is going to take forever!
The clock continues to tick and it is now 12:45 PM. Nothing drastic has happened. After 45 minutes, the water level has only reached the first row of seats. No worries. The stadium is still 93% empty. There’s plenty of time left, right?
Three minutes later at 12:48 PM, to your horror, the stadium is half filled with water! What the…!? You tell yourself to relax. You still have enough time to get out. You shoot straight for the exit.
But it’s too late!
One minute later at 12:49 PM, just before you reach the exit, you find yourself engulfed in water that has completely filled the stadium all the way to the top!
Now let that sink in for a bit (no pun intended).
This is how the compound effect feels like: at first it’s like nothing much is happening… then you notice some changes… and before you know it… BAM!
2. The Three Stages of the Compound Effect
For me, I like to refer to the compound effect as the “hockey stick” effect. I mean… don’t you think the exponential curve looks like a hockey stick?
If you didn’t already know, the hockey stick is made up of three main parts: the Shaft, the Kick Point and the Blade.
And just like the hockey stick, the compound effect is made up of three parts or stages when applied to wealth building:
1️⃣ The Shaft — This is the 12:00—12:45 PM period of the Stadium Flooding story. It’s the early stage when you start saving and investing. It will be slow and gradual at the beginning (we all have to start somewhere). Sometimes you feel like you’re making very little progress. Sadly, this is the stage where many may give up on saving and “boring” investing and resort to some “get rich quick” scheme.
2️⃣ The Kick Point — This is the 12:45—12:48 PM period. It is when things start to take a significant turn. It’s the stage where you begin to see the fruits of your investments really pay off and financial independence is just round the corner. The Kick Point is where every investor hopes to get to. At this stage, some will feel happy and contented, like Mrs Wow and I.
3️⃣ The Blade — This is the 12:49 PM period and beyond. It is when your investment portfolio has “exploded” in value and you are on the sure path to financial abundance. It’s the stage where you have more money than you will every need in your lifetime, lasting many generations after you.
During the Shaft stage, many may give up on saving and “boring” investing and resort to some “get rich quick” scheme.
3. Keep Calm and Let Your Wealth Compound
In reality, where investing is concerned, the compound effect isn’t going to be as dramatic as the Flooding Stadium story. It’s not like you will wake up one morning, check your investment portfolio and realise that you are an overnight multimillionaire. That’s not exactly how it works.
For me, the main takeaway of the Flooding Stadium story is the Shaft stage. At the beginning of your investment journey, returns may seem minuscule and growth may seem slow, especially when compared to some anonymous Redditor or YouTuber bragging about his 10X return on his latest stock pick.
All I can say is, don’t be distracted by the noise. Don’t get impatient. Don’t FOMO and start chasing the latest and hottest AI stock. Don’t be motivated by greed and take on unnecessary risk. Just stick to the plan and let the magic of compounding do its thing. Remember that in the game of investing, the tortoise wins. It’s a marathon, not a sprint.
Far too many investors got impatient along the way. Far too many got fearful or greedy and fell off the compounding wave. Some learnt their lesson and made a comeback. Sadly, others never recover.
Don’t be distracted by the noise. Don’t get impatient. Don’t FOMO.
Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily.” Often times, the interruption is caused by our own emotions.
To stay on course, I always remind myself that wealth building ultimately starts from within. Be patient. With the right mindset and attitude, you will be able to ride the wave of the compound effect and grow your wealth till you are more than contented.
To your unwavering success!