In a recent article for the Collaborative Fund, Morgan Housel addresses the topic of compounding through several interesting anecdotes about ice ages and Warren Buffett, among others.
A hundred years ago, Housel explains, a Serbian scientist discovered that our earth “wobbles just enough to change how much solar radiation is let in, occasionally enough to wreak havoc.” But Housel points out that subsequent studies found a more layered explanation, that moderately cool summers were the culprit—when the earth didn’t get warm enough to melt all the snow and ice, the compounding effect (over tens of thousands of years) led to an earth covered in “miles-thick” ice. “It’s an example of compounding in nature,” writes Housel, “and it shows what can be built off a freakishly small base.”
Housel goes on to discuss Warren Buffett’s fortune, and how few of the several thousand books dedicated to the subject “pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor but being a good investor since he was literally a child” (Buffett began investing as a pre-teen). Housel outlines calculations that illustrate how Buffett’s fortune would be reduced had he began his investing career later in life.
Compounding, Housel argues, “is not intuitive, so it’s systematically overlooked and underappreciated,” and concludes, “there are times when you have to relentlessly leave something that looks small alone so it has a chance of compounding into something big.”