I hear everyone say let compounding do its magic, but nobody explains what it truly is

Compounding seems obvious to explain. You put money, it grows. Then, it has a larger base on which to grow. So on goes compounding. Seems straightforward. But in reality, the explanation is superficial

Thinking deeper reveals what it truly is and the unexpected places you would find it

Compounding is the property of systems. Systems that can accumulate something can compound. This “something” is known in theory as stock. Wealth is the obvious example, but it can be GDP, human skill, networks, or even AI model performance. Understanding systems reveals the first deep truth about compounding.

Multiple invisible parts of the system are at work, which “show” as compounding

Wealth invested in equity grows because the underlying economic system is working. Billions of people, millions of businesses, and hundreds of markets operate in this complex system. But wealth held in cash doesn’t grow, revealing the second truth about compounding.

Compounding benefits only happen when you put your “skin in the game” on the underlying system

Cash doesn’t give you any skin in the game in the economy. I could have used “invest”, but you will see why skin in the game is a better explainer. Your skills compound only when you put effort, or skin in the game. Your network compounds only when you put time, or skin in the game. The examples are countless, but skin in the game is necessary. If you take out your skin in the game quickly, the third deep truth about compounding is revealed.

Removing your skin in the game breaks compounding, implying it is a long-term commitment

I have realized there are two kinds of approaches to life: short-term optimization and long-term compounding. Short-term optimizers constantly switch between different systems (e.g., career, country, commitment), but long-term compounders stick to the same system. Short-term optimizers look like they are winning in the beginning, but eventually, it is the long-term compounders who win. Once the compounder takes off, it is impossible to beat an exponent.

You now realize compounders are everywere

Look for systems that allow you to have skin in the game, which requires long-term commitment. Compounding will be possible. Startups, knowledge, habits, reputation all check these boxes. But perhaps the greatest compounder is not too far from you.

Compound yourself to see real magic