Law of Compounding: Many Don’t Maximise It Yet

Albert Einstein called the Law of Compounding the 8th wonder of the world. He believed it was a universal principal that can be applied in almost everything we touch.

But the question is – are you MAXIMISING on the Law of Compounding?

To be honest, I’m sure many of you are already benefiting from it. Some of you will be taking advantage of it consciously and some may not be doing it consciously, and it doesn’t matter too much.

However, for those of you who wants to really truly become a professional trader (or whichever career you decide to pursue), it may be useful to study this topic a little more. Learn more about it, invest time into it and keep studying it until you are living it and breathing it, and until you can maximise it in all areas.

Sounds exciting?

If yes, let’s explore more.

What is the Law of Compounding?

The law of compounding has a few useful and powerful benefits. For many, what you are probably exposed to already (especially if you’re active in the financial market) is the idea of compounding interest.

Note: If you have not heard about the idea of compounding interest, then it’s not too late to start now. Here’s how Wikipedia explains it – click here.

Typically, what you’ll read about compounding interest would probably sound something like this:

The Law of Compound Interest says that investing your money carefully and allowing it to grow at compound interest will eventually make you rich.

A simple example is, if you have an investment that delivers a 10% annual return and you invested $100 in it, you will get $110 at the end of the first year. By compounding it year on year, you should expect a return of roughly $285 at the end of the 10th year.

Sounds familiar?

I’m sure it is for many. And all these ideas of backed by powerful books like “The Richest Man in Babylon” by George Clason and “Secrets of the Millionaire Mind” by T. Harv Eker. These authors are both huge advocates of saving 10% (or more) of your income and compounding them.

This law works all the time and it’s applied to anyone who implements it. That’s why it’s called a universal law.

Assets work the same way. Cash flow work the same way. Even businesses work the same way. While that is all true and good, this law is still not FULLY utilized by many yet.

You see, even though this law is known as the “wealth miracle” sent from heaven, there are other another aspect of this law is that can benefit financial traders.

Let’s break this down a little more.

Compounding Skills

Reading the header of this section, I’m guessing you already know which direction I’m heading. However, before you move ahead, I want you to consider this seriously:

How long does an infant (assuming one is normal and healthy, and his name is Jon) takes before he can walk?

More importantly, Jon probably did not wake up one day and started running, right?

Probably not. But why not?

If I had to guess, Jon probably had to compound his skills (of walking).

Interesting theory, right?

Thinking about it. Jon had to go through days after days of standing, falling, crawling and trying very hard to get back on their feet, before he could start to walk. And as he kept doing it, Jon can even one day walk a straight line. Before you know it, he started running.

As you can see, if everyone of us can walk, sing, talk, jump or run, that means all of us can compound our skills. These are just simple, yet overlooked, examples of how each of us can compound our skills.

Agree?

Now, let’s give this an idea a little tweak.

The infant grows up and plans to become an astronaut. He is now preparing his travel to the moon. The interesting thing is, even after many years of walking on earth, Jon had to retrain his “walking” skills before he is able to walk confidently on the moon.

That makes perfect sense to most of us. But why would he need to re-train those skills?

From science, we know that the moon has a different level of gravity pull and other factors affecting it. Putting that aside, the truth is, Jon probably stopped learning the skills required to walk after he was already walking confidently.

Right?

That means, Jon stopped compounding his skills (of walking) after a while.

And this is the main point I’m trying to make. Many of us stop learning after a certain level, and that could be driven by any or many reasons. Once we stop learning, we stop building our winning belief cycles and we stop compounding our skills.

Make sense?

So, if you understand this, then let a ponder on your own trading journey. When and what skills have you stopped compounding? What are the skills that you’ve stopped learning after you became confident?

Feel free to take time out to think about this. Alternatively, hold those thoughts as I continue to share more.

Compounding Our Psychology

“But Alwin, I’ve been trading for many years now, why am I not profitable yet?”

I’m guessing some of you might be asking me this already. So here’s my question back to you,

Are you compounding a BALANCED range of skills to trade profitably? Did you put down trading psychology as one of the areas that you’ve stopped learning?

I’m guessing that many of you are still focusing on the technical trading skills – which is important – but have neglected the fact that a trading system is only 20% of the entire game. And if you are a follower this TYE site, then like me, you might also occasionally overlook certain aspects of your trading psychology (yes, trading psychology has many sub-areas) and have to get back to it.

Either way, my point is this. You can’t walk properly if you only train your left foot and forgot about your right. Likewise, you cannot learn to walk if your vestibule is not healthy (see note below).

Note: Without going into too much detail, the vestibule is a key system in our head that helps balance our body.

Having the Right Balance

Trading, like walking, is about compounding the right skills. To start off, each of the skills needs to have the right balance.

Many traders (especially if you have forgotten about trading psychology) only focus on building chart time, entry points, or exit points. Yet, have completely forgotten to compound skills relating to trading emotions, money management or trading routines.

Like Jon, if you don’t get a “re-train” of your skills, you won’t be able to move to the next level. And trust me, while I’ve not personally walked on the moon, I know for certain that the training required is going to be a rigorous one.

For traders, while physical toughness may not be a requirement, psychological toughness is definitely one.

Compounding Your Goals

Next, if you understand my point on your psychology, let’s talk about your goals.

Are you compounding your trading and/or life goals?

In case you’re talking about that one goal which only work on every 1st of January, you do realised that you can’t just spend 3 days working on your goals, and not touch it for 3 years, then expecting a miracle to happen. Right?

While that’s happening, your motivation level goes yo-yo between the start of the year and the end of the year. And that’s because of both your towards-to and away-from motivations.

Note: In case you’ve not read it, I’ve written about motivation theories and how they work (read here). In short, these are the “engines” that will help you propel forward towards your goals.

As mentioned earlier, we know for certain the law of compounding works the same way for our goals. However, if your motivation level yo-yo all the time, it’s like moving 2 steps forward before moving 3 steps back, and then moving 1 step forward again.

Hence, we need to regularly work on fine tuning our goals and make sure that we are connected to it. When that happens, the towards-to motivation gets time to solidify and it gets to compound our goals.

In other words, if your motivation is done at the right level and it’s not just a sudden impulse of ra ra motivation, your goals can only clearer and clearer.

When that happens, you know that your compounding is working.

Summary

If you’re reading this now, it means that you’re probably thinking deep about what else you are or want to compound.

Right? I certainly hope so.

The law of compounding is a law that helps build muscles and you have more muscles than you can consciously remember. So take time out to identify those areas (especially those where it needs balancing).

Have a plan and work on maximising different areas of your trading (and non-trading). Once you get the hang of it, all areas can work like magic. As mentioned, it’s a miracle from heaven.

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