Most people are familiar with the concept of compound interest. They can put some value in an investment calculator and see how money can grow incredibly over long periods of time – even with small compounding rates. The results when one first realizes the staggering growth potential are jaw-dropping. Its easy to see the growth rate of money because it can be calculated directly. There’s no mistaking the fact that your account value has increased by some percentage. Compound interest principle applies to many other aspects of life – its just easier to see with money.
Why are we able to grow money in the stock market in the first place? Simply put, our society progresses and when I invest in the stock market generally, I’m investing in societal progress. On a more micro scale, when I invest in a single company, I’m investing in the progress (ie growth) of that company. Also, growth begets growth. The more our society advances, the easier and faster it advances. Now, there are occasionally set backs to progress. As a result, the stock market as a whole does not grow smoothly like we want it to.
Let me be more clear on what progress entails. Mostly progress comes through scientific, engineering or productivity advancements/improvements. Curing a major disease, such as polio or cancer is an advancement that furthers the progress of humankind. Discovering sub atomic particles was a major scientific advancement that lead to the engineering and productivity advancement of computers and the internet. These are just major advancements, but little, daily advancements can grow exponentially into something major.
For example, computers advance a little at a time, but they’re being advanced hundreds to thousands of times a day when someone comes up with something new that improves some computer activity even a little bit. With that little improvement, it enables hundreds to millions of people to improve their other (not necessarily computer) activities. The computer improvement process has grown exponentially. With occasional blips or bubbles, I strongly believe it will continue to grow exponentially for quite some time.
I believe in human progress on a long-term horizon. I believe we will continue to make significant advancements as time goes on. Those enhancments will have an exponential growth affect on our society. Sometimes we will have brief periods that slow or set back progress, but over the long-term we will continue to grow. This is why I continue to invest in the markets in general index funds (and specific companies) even when investor confidence is beyond low in our ability to continue growth.
Our level of advancement has been huge over the last 200 years. I think about where we used to be, what we were capable of, and how much more we understand now and I’m amazed. I believe the next 50 years will easily blow away those 200 years in terms of how much we grow. This is why I keep investing in the stock market.
The idea of exponential growth can be applied to more micro environments that aren’t directly related to money. I spend a lot of time automating tasks at work so they take less to no time at all to do from that point forward. Its a lot of work up front, but eventually I get significant time savings that allows me to automate another task. Once I’m done automating the 2nd task I now have even more time to automate another task. The more tasks I automate, the more time I free up to automate other tasks. This is exponential progress.
For example, lets say I spend 10 hours a week on 3 different tasks – tasks A, B, and C. However, I decide to spend 50 hours over the course of several weeks semi-automating task A to where it only takes 1 hour a week to run. After that is finished I have 9 hours a week freed up for automating task B to the same level. Then I have 18 extra hours a week freed up to work on automating task C. The more I work to improve the time it takes to complete a task, the more time I have to improve that and other tasks and, as a result of the more time available, the faster I’m able to improve them. This is exponential growth in my productivity.
To be clear, my growth doesn’t always grow smoothly. There are often set backs or time wasted going down a path that fails, but over the long run, I still make progress and the more progress I make, the faster I can progress.
This brings me back around to the stock market. There will always be bumps in the road and the market will not grow smoothly as many people wish it to, but, barring near apocalyptic events, it will continue grow exponentially over the long-term. Now, some people think the current bank situation qualifies as apocalyptic, but people are still going to work and buying things.
