Roses Outside Study Window Joshua Kennon Year Two

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

The older I get, the more amazed at I am at the power of compounding in all areas of life.  Compounding is one of the most powerful forces at work in the universe.  It exerts itself in all sorts of arenas, ranging from finance to farming.  To illustrate: As I sit in my home study, publishing a few more pieces for this month now that I’ve returned from California, I’m looking out the window over the rose bushes we put in last summer.  Back then, I posted this picture of what they looked like almost immediately after they were in the ground …

Knockout Rose Bushes

The rose bushes I showed you the day we planted them back on April 21st, 2013.

Here we are 13 months later and they have grown into this …

Joshua Kennon Roses Year Two Sidewalk

The rose bushes as of this morning. We are hoping to pull the weeds and replace the mulch this weekend, if we have time.

Roses Outside Study Window Joshua Kennon Year Two

Now, I get to sit in my home study and write, looking out over them.  They require very little work, anymore, yet I’m still collecting dividends from the enjoyment.  A little bit of effort in the beginning produced what will become years of satisfaction.

By next year, I’ll be able to take cuttings and give to friends and family or plant additional bushes on the property because the roses themselves will have grown to a size where they are producing their own offspring without much effort.  Once the additional work was done, a bit of maintenance here and there was all that was necessary because time did the rest.

I get the same feeling of satisfaction when I look over my investments.  Even the smaller, academic experiments like the Walt Disney shares I buy as a souvenir and we use as a didactic exercise on this site demonstrate the same pattern.  The original block of 100 shares bought years ago on August 30th, 2011 for $3,304 have grown to $8,624 ($8,403 in market value, $221 in cash dividends received).  Every $1.00 planted has now blossomed into $2.61.

[mainbodyad]Skills are the same way.  Whether it’s learning a foreign language, how to play an instrument, learning to cook, or teaching yourself to utilize a rational framework for decisions, these small, individual actions, over long periods of time, grow into something much bigger than the inputs, yielding rewards vastly disproportionate to the outlay.  Who wouldn’t love it?

On the flip side, if you aren’t careful, you can get yourself caught in what I’ve heard described as the tyranny of compounding.  Use credit card debt?  If you’re not judicious, you might find yourself paying exponentially more than the amount you spent over the years as you ship off your cash to banks who demand double-digit interest rates.  Sign over your life to high student loan debt?  That can be a hard monkey to get off your back, taking years, if not decades, to overcome.  Wait an extra ten years to begin investing for retirement?  Now you have to come up with double or triple the monthly savings to end up where you otherwise would have.  Once you’re stuck in the negative side of compounding, be it in your career, your finances, or your relationships, it can be a difficult thing to break, sometimes requiring heroic efforts.  That’s why it’s so important to get it right early in life.  If you can get yourself on the right path in your 20’s and 30’s, it’s much more of a cakewalk.

A lot of success in life can be secured by those who follow a simple prescription:

  1. Ensure sure the starting conditions and terms are the most favorable you can secure and make sense both relatively and absolutely.  You can’t grow corn in the desert without a lot more resource devotion.
  2. Plant the initial seed, exert the initial effort, or undertake the initial project so that you will enjoy the fruits year after year in the future.
  3. Maintain what needs to be maintained and repair what needs to be repaired, never letting atrophy take down your harvest.  The world is full of boll weevils and you have to constantly be on guard against them.
  4. Let time do the rest until you’re ready to enjoy the rewards.

Just as importantly, you need a clear vision for your future.  What was it the great proverb writer said?  “Where there is no vision, the people perish”?  I wake up every morning asking myself, “What can I do now, in this moment, that will let me have the things, and life, I want in 1 year, 2 years, 3 years, 5 years, 10 years, 25 years?”.  I also invert the question and ask myself, “What can I do now, in this moment, that will let me avoid the things I don’t want to experience in 1 year, 2 years, 3 years, 5 years, 10 years, 25 years?”.

That lens changes everything.  It draws you towards certain types of work.  It makes you avoid certain time sinks.  Once you get a little going for you, victory turns into victory because you get these economies of scale and positive feedback loops.  One good thing leapfrogs into another, opening doors that otherwise wouldn’t have manifested in your life.

My dream for each of you is you get to harness these forces for your own family so you enjoy the time you have here.  It won’t happen by accident.  You need to systematically, methodically identify what it is you want, the fastest way to accomplish it consistent with the sacrifices and trade-offs you are willing to make, and then get to work.  Think of yourself like a farmer.  You might not be putting apple trees in the ground, but the process is the same.  If you choose your crop wisely, the rest tends to fall into place.  If you’re wise enough to choose a process you enjoy, the waiting is a lot of fun because you’re too busy to care about the eventually proceeds beyond periodically monitoring them.

You also have to remember not to be too rigid.  A lot of times, the best opportunities don’t look like opportunities when they happen.  When Warren Buffett was rejected from Harvard Business School, that didn’t feel like a win.  Yet, it was the event that sent him into the orbit of legendary investor Benjamin Graham, who served as his mentor and intellectual guide.