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The Curse of Compounding
Looking for a job
I’m studying for a Master’s degree at Brandeis, in Boston. I’ll be graduating in May of 2024 and I’m looking for a job in a long-only equity fund, in the line of the companies and philosophy I follow here. If you know of anything, I’d really appreciate you letting me know.
I find myself in the need of detouring. I am not sure when was the last time I wrote about something completely outside of the usual scope, perhaps a couple of months ago. Nonetheless, there’s been this topic in my mind for some weeks now and I feel it deserves to be explored.
Compounding interest refers to the fact that not only will your initial money earn interest, but the interest it generates will generate interest as well. Our mind is, I believe, not biologically designed to understand exponentiality. There might be some element of the impossibility of calculating its effects, which simply exceeds our processing capacity. In investing, compounding interest is something we are all familiar with and it’s the very foundation for why thinking long-term is so powerful.
What’s often missed by people is that compounding interest is not exclusively a financial concept. If taken a bit further, compounding is embedded in the very nature of our world. Ever since the first molecules and living beings emerged, it was a matter of natural iterations. The environment molds physical shapes, genomic sequences, and everything, according to the ‘requirements for long-term survival’. Each of these iterations and improvements are made upon the previous base, which are made upon the previous base.
Deeply understanding the concept is beyond difficult and, doing so, leads to dramatic changes in behavior. As wonderful as this sounds, the pre-requisite is terrifying, more so at a young age. It puts things in a perspective that’s almost unilateral. The following chart somewhat represents the way I’m thinking about this.
Knowledge is what composes the foundational building blocks for how far can ideas get, not even sure in which sense. As we acquire more knowledge and dedicate time to thinking, ideas are formed. Repeating the process increases ideas’ quality because they are built on the previous ones, getting increasingly more robust as pillars are added. The higher you go up the ladder, the wiser you get. Eventually, I suspect we arrive to the ‘best ideas’ we can reach, a realm which represents as close to the “truth” as we, individually, can get.
Time allows for the processing of information, which is what ultimately determines how far can we get. Our mental capacity, in my opinion, imposes some sort of required time for connections to be made, for information to be processed and for ideas to be generated. The higher the mind’s computing power, the faster will it get to better and better ideas.
Note that, again, the foundation is knowledge, which can be acquired by observing, reading or practicing. Each of the latter consume their respective time and have different outcomes, in terms of both knowledge and ideas that can arise. Understanding this has infinitely clouded my judgement with what respects to time allocation.
Knowing, hypothetically, that it is knowledge and time what will ultimately determine how far will I stand from “truths”, if there’s any, has produced detrimental results in my decision-making. It becomes really hard to tell what to do each minute of the day. Understanding how far knowledge I acquire today can go makes me re-think whether or not I should be simply reading all day long. Moreover, almost all activities seem like a waste of time, understanding how high the opportunity cost is.
The latter statement is of course dangerous. Reading, thinking and getting ideas are, mostly, done in solitude, which is not necessarily a long-term healthy strategy. I don’t know, not sure how to proceed. This is something that’s been disturbing me for the past time and I wanted to share it with you. If you have some advice or thoughts on the matter, feel free to share them below or email me at firstname.lastname@example.org.
Another terrifying article to write. I clarify here that the above are all hypotheses, theories and thoughts. They should by no means be taken as anything but that. Anyway, hope you found the read somewhat useful!
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