Warren Buffet has an interesting principal he follows.
At the end of each year, a company gets to decide what to do with their earnings. Some companies issue a portion of the money to their shareholders; this is called a dividend. Most investors love it, in fact some design their portfolios to exclusively invest in companies that provide annual dividends. Warren on the other hand? He HATES investing in these companies.
Why? When you receive a dividend, you realize gains, which means you have to pay taxes each year.
Warren would rather the money was reinvested into the business to help it grow.
First off, this allows him to avoid taxes for as long as he can. But if we remember the rules of compounding, it allows his money to stay in the system and work even harder. Warren wants to be taxed only once, at the very end when the journey is over, not throughout.
But once your money is in, we want to optimize towards growth – this means paying as little as possible.
“The objective is to buy a non-dividend-paying stock that compounds for 30 years at 15% a year and pay only a single tax at the end of the period. After taxes this works out to a 13.4% annual rate of return.
Charlie Munger, 1998
If you invested $10,000 with Warren Buffett, at his annual rate of return of 23%, the following chart shows you the amount you’d have in 30 years, based off if you paid taxes each year versus allowed the money to keep compounding.
Assumes 23% compounding annual rate, blue line allows money to compound, red line removes taxes at 35% rate each year It’s worth noting that these are extremely high rates of return, and the average investor can expect to get closer to 8% ARR
Breaks vs BRAKES
Breaks are healthy – they allow us to recover and admire our results.
Trouble comes when we allow a short break to turn into hitting the brakes (that is, stopping completely).
Here’s what what I mean:
Health – When we feel physically in shape, we decide to stop exercising – a few days becomes a few weeks
Learning – When we believe we’ve mastered enough, we decide to stop learning – binge reading becomes binge television
Relationships – When we sense our connections are strong, we decide to stop building them – personal texting becomes singular social media posting
Warren’s principal reminds us of the power of pausing too often or for too long.
Once you stop showing up, you stop gaining.
Keep It Going
You’ve decided to start (that’s great!), but don’t underestimate the importance of continued hustle. The laws of compounding don’t care if you’ve had a bad day, or it’s a busy week.
When we decide to follow through, we continue to gain, period.
So wherever you are, keep it up, and just like Warren you too will enjoy the aggregation, not of a single year, but an exponential 30 years.
Getting up when others won’t is what makes all the difference.
And who knows, that determination might be worth an extra $2.8M dollars, in whichever domain you’re compounding.
There’s a divide on the horizon, and it’s unlike ones we’ve seen in the past.
When we use the word “divide” to describe a phenomenon, it usually refers to access; one group of people has access to a resource, while a second group does not. We’ve seen this around the world with clean water, education, and nutritious foods. If you happen to be born in a country that doesn’t have one of these resources (or a limited supply of one), you’re at a disadvantage and there’s not much you can do about it – tough luck.
But today we’re looking at a different divide, one which I believe will be synonymous with the 21st century. It has to do with access, but in a completely new way.
I call it, “The Next Divide” and it’s a digital one.
Chapter 1:Active vs Passive
Are you using your phone, or is your phone using you?
We live in an amazing time. Your phone can retrieve endless quantities of entertainment, social connection and knowledge.
Consider for a moment that you’re able to travel back in time to 1980. You encounter your 1980’s doppelgänger self and you do your best to explain smartphones in 2019.
Let’s face it, we tend to spend a large portion of our time surfing our phones without meaningful intent. This isn’t completely our fault, it more has to do with the implicit relationship between you and your phone.
While your phone offers you endless possibilities, it comes at a cost. Instead of money, most apps demand something else: your time and attention.
New-age business models
Internet companies (and many smartphone apps) make money by keeping you on their products longer. They do this by monetizing their products through online advertising, which directly correlates with engagement and time spent on their website. The more they know about you, the better they can convert your data into cash.
Question: What happens when our most valuable businesses operate in this way?
Answer: Our most brilliant data scientists and software engineers are being taken from every other industry to work on the same objective: keep you online longer.
According to Tristan Harris, a “design ethicist,” the problem isn’t that people lack willpower; it’s that “there are a thousand people on the other side of the screen whose job it is to break down the self-regulation you have.”
While you’re scrolling through Instagram, there are thousands of MIT, Harvard, and Berkley engineers running multivariate tests, all to determine the best way to break down your self-control and keep you on their app longer.
Personally, I find myself being used, all the time.
Last week, I decided to open Instagram to see what my friends were up to. My intention was to scroll for 5 or 10 minutes, but 30 minutes later I caught myself mindlessly watching puppy video clips. The power dynamic shifted because I was no longer making the choices.
For the first five minutes, I was in control of the content, but soon after Instagram took over by deciding what to put in front of me. Facebook had been battling for control over my attention, and it had won.
Digital and online for that matter, isn’t a story of all negatives, there are positives too:
When I was 18 I received a guitar as a gift. Before then my involvement in playing instruments was limited, however learning guitar was a cool aspiration I’d always had. Unlike generations before me, I shrugged off formal training, and instead took to YouTube for lessons.
Between the hundreds of videos and endless practicing, I learned how to play guitar and still do today. Sure, that took discipline; I played for at least an hour everyday after school, but there were far less distractions back then.
This is just one small example; there are millions of people who have elevated their musical ability through the type of lessons the internet can provide. If you take a step back and consider this idea, you’ll recognize that people are applying it to all areas of expertise (ie: coding, art, history, the list goes on).
So ask yourself, who really has the power in your tech relationship? And further, are are you trading your asset (time and attention) at a positive return? Or perhaps the technology has the upper-hand?
Summary: The 21st Century has created a new tier of human potential, but the question is…
Chapter 2:Which Group Are You In?
While technology is accelerating our ability to achieve amazing intellectual, creative and productive feats, it’s ability to distract us is accelerating at an equal clip. You can’t go a day without being inspired, yet so distracted at the same time. It’s these conditions that make the digital divide possible.
Sometimes success is 3% brains and 97% not getting distracted by the internet.
Shane Parrish
The digital divide will create two groups:
Group 1 is able to control their focus and leverage technology to improve themselves, and moreover, reach greater potential.
[Technology] is a great way to automate a habit. You can save for retirement with an automatic deduction from your paycheck. You can curtail social media browsing with a website blocker.
Technology can transform actions that were once hard, annoying, and complicated into behaviors that are easy, painless, and simple.
It is the most reliable and effective way to guarantee the right behavior.
James Clear
Meanwhile, Group 2 is trading their time for mindless surfing. Their behavior is not only distracting themselves from the world around them, but it’s also causing them to achieve less.
And technology can rewire our brains.
The Sleeping Scientist
We each have a little scientist named Hank, who manages a lab within our brain. It’s Hank’s job to control your focus, and he does this by balancing your distraction liquid 24 hours a day, 7 days a week.
There’s a constant replenishment of distraction at all times; your thoughts wander as new stimuli enter and exit your external environment.
Some people are born with more liquid than normal, others develop habits which increase their exposure over time. Ultimately, you train your Hank to manage his beakers in the best way possible. My personal favorite strategy is meditation.
But the crux of the problem is that digital applications are training your Hank to be irresponsible. Have you ever sat down to work on something, only to find yourself distracted 10 minutes later? What about open your phone to do something, and then completely forget?
That’s your Hank falling asleep in the lab, and when Hank doesn’t pay attention, he causes leaks and spills.
Here’s what distraction looks like:
Small naps lead to extreme compounding. . One laboratory spill leads to a broken beaker, which leads to less liquid control in the future. Lab explosions move from a rarity to a constant affair in your head.
So over a short period (1-2weeks), the difference is marginal. However as the time series extends further, the differences become insurmountable.
I’ve written about the power of compounding many times; Albert Einstein dubbed it as one of the greatest wonders of the universe. Talk about a bold statement, especially from a man who revolutionized modern day physics (and astronomy).
Summary: Whether you’re in Group 1 or Group 2, will become a life-changing characteristic.
Over the next ten years, this macro trend will lead to enormously disparate outcomes. Great or terrible, it all depends on which group you fall into.
Chapter 3: The AI Revolution
We’ve now established that access (per the traditional sense) isn’t the problem; each group can connect to the internet at relatively similar speeds. Instead this divide focuses on the way in which people leverage the internet (use the resource).
Enter Artificial Intelligence, aka: the great accelerator.
AI is a comprehensive subject, so I’m going to over-simplify a bit here. If afterwards readers have greater interest in the mechanics, I can write up a separate blog post. But for now, let’s just say there have been some major advancements in the field.
Once of the largest breakthroughs is around this idea called deep learning.
Previously you could only train a computer to follow a set of rules (or simple algorithms). You would tell a machine that if it hears the phrase, “Knock, Knock” it needs to answer, “Who’s there?” Any variations from “Knock, Knock” and the computer not be able to respond.
Now, with deep learning, we can give the computer a massive set of data (in this case jokes) and train it to learn humor. Scientists watch it learn in real time and correct it whenever it makes a mistake. After lots of data and repetition, it eventually “learns” the idea.
Mechanically the computer forms connections just like how our brains do. These are called neural networks, and to get a better visualization of how these systems work, you can check out the Tensorflow Playground.
What does this mean for the Digital Divide?
AI is (already) learning your behaviors, tailoring content, and therefore be able to break you down significantly further.
Remember those thousands of MIT graduates running multi-variate tests? Now imagine if they programmed a super-computer with more power and genius level pattern recognition. They will now discover things about you that were unfathomable with humans experimenting alone.
Summary: AI is forming a massive crater in the ground, and it is going to push the two groups further apart.
It will be on us to make sure there are enough formidable bridges to provide opportunity for those stuck on one side, however more likely than not, AI Valley will destroy your hopes of crossing… if you wait too long.
Conclusion: Big Distractions or Big Dreams?
I believe these gaps will be filled over time, but it’s going to take time and large innovations in technology.
Right now companies are making money off of your time and attention, so there’s no incentive to turn a passive person into a more active person. Yet, if we want to grow to our total potential, we need to flip the script and change the way we use our attention ourselves.
Which side of the digital divide will you be on?
The earlier you decide, the more you’ll gain.
“Don’t be on your deathbed someday, having squandered your one chance at life, full of regret because you pursued little distractions instead of big dreams.”
“Good things do not return in a one-for-one manner. Individual actions are not directly rewarded. It is on average that doing good improves the quality of life for you and the people around you.”
Our brains are wired to understand our choices and their relationship to the world as one-for-one.
If you tie your shoes, then you won’t trip. That’s a single action, which returns a single outcome. It doesn’t take long for you to recognize the relationship between these two actions, and for you to adopt the new behavior into your life.
This mental model is helpful, and it has allowed humans to survive.
When Caveman Carl slept in a cave, he decreased his likelihood of being eaten by Tigers. The benefit of improved safety was immediately realized and he moved into his new home the next day. Carl’s Cave-Estate was passed down to future generations, and his family lived on.
One single action, led to one positive outcome.
Many Actions = 1 (Better) Outcome
However the greatest ROI comes from many-for-one outcomes; areas where it takes a great deal of tries, repeating the same behavior, without experiencing any benefits in the short-term.
Take exercising. If you go to the gym only twice, that will not cut it. There’s a high probability that your body will ache and you will not notice any difference in your physical appearance.
However, if you make exercise a daily habit, after 2 months you will lose weight, have more energy, and notice physically differences.
Many-for-one outcomes take a long time to provide a return, but when the results finally appear, the payoff is exponentially larger.
The games we play
Taking longer than expected?
Facing a small setback?
Don’t get discouraged, there’s a good chance you’re just playing a many-for-one game. Remember that you’re in the business of maximizing your total potential, which is the greatest game you can play. These wins come over long periods of high volume effort; that’s unavoidable.
To grow stronger, make exercise a ritual. To sell a company, launch as many as you can. To build a reputation, serve others first.
Last week I was invited to speak at Indiana University’s Kelley Business School. The theme for the day was innovation; where does it come from?
My talk bridges lessons from successful entrepreneurs (what did they do differently?) and my own college experience (which events, in hindsight, made all the difference?).
Check out the video below, and if you enjoy it, share and subscribe!
Last week Jack Bogle passed away. A true financial great, Jack made some of the most pivotal contributions to finance and investing throughout his career. Don’t just take my word for it, even other legends agree:
“If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle.
In his early years, Jack was frequently mocked by the investment-management industry.
Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”
In this writeup, I outline my favorite Jack Bogle lessons, all of them have applications outside of money management and may be applied in wider ways across your life. The quotes within are taken from, “The Bogleheads’ Guide to Investing“
Compounding Interest
The best gains in life grow in a compounding fashion; returns continue to grow on top of prior returns. The amounts your money can earn in Year 1 will be far smaller than year 2, year 3 or year 5.
A comparison of two investment accounts. The first starts with $10 and grows by $1 everyday. The second starts with 1 penny and doubles everyday. The penny will be worth more by day 13, and by day 16 (shown above) the compounding account will be worth 13x that of the linear one.
“It may not seem like a big deal, until you realize that every time the money doubles, it becomes 4, then 8, then 16 times your original investment.
Start with one penny and double it every day, on the thirtieth day it compounds to $5,338,709.12.”
LESSON: Most people search for linear gains. Instead, set your pursuits on investments that can yield compounding results.
If your young, your greatest advantage is starting earlier than your competition. “The best time to plant a tree is twenty years ago. The second best time is now.” The old proverb goes. At face-value, a few years doesn’t sound like much, until you account for compounding interest.
If you contribute $1,000 each year into an investment account, which compounds at 7% each year, above is the final balance you’d have by age 67, based off what age you start.
“Let’s assume a child is born today. For the next 65 years, she or her parents will deposit a certain amount into a stock mutual fund that pays an average annual return of 10 percent.
How much do you think they need to deposit each day in order for her to have $1 million at age 65? Five dollars? Ten Dollars?
In fact, a daily deposit of only 54 cents compounds to more than $1 million in 65 years.
It really helps to start early.“
LESSON: The most important thing you can do is start today. Forget about the marginal progress you’ll make on Day 1, it’s the fact that you got off the couch and began that matters most.
The common-person thinks the only path to wealth is to generate more income. While making more money can help, there’s a second part to the equation, one which is often times ignored: minimizing costs.
“Reducing your spending [costs] is financially more efficient than earning more money.
For every additional dollar of earnings you plan to save, you will likely have to earn $1.40 because you have to pay income taxes.
However, every dollar unspent can be invested [immediately for compounding gains].”
LESSON: While most people focus on gains, you should also consider the power of subtractions. You don’t need to add another book to your reading list, you need to remove one not servicing your needs.
Index Fund vs. Fund Managers
Choosing a single winner is far harder than it may appear. While markets are meant to show the “real value” of an asset, it’s nearly impossible to predict their future value. You’ll fare much better by holding the entire market; when the economy wins, you win too.
The fastest way to get rich in the stock market is to own the next Microsoft. The fastest way to lose all your money is to own the next Enron. Identifying them in advance is impossible.
However, you don’t have to identify them in advance to make a healthy return on your investment. If you buy an S&P 500 index fund, your investment is highly diversified and its performance will match that of 500 leading U.S. corporations’ stocks.
Over 10 years, the average expert-picked stocks were up an annualized 8% compared to the market index return of 9.5%.
A 1.5% difference may not seem like much, but compounded over a lifetime it makes a tremendous difference.
LESSON: Don’t waste your time trying to find a needle in a haystack. Sure you may get lucky sometimes, but odds are you’ll fare better by holding a small piece of everything. Worry about getting the market (macro) right, not the stock (micro).
The most common mistake that people make when setting their goals is either (1) they try to change too much at once or (2) they emphasize results instead of consistency. If you want to nail your resolution, hone in on one goal and focus on showing up everyday. Learn more on forming better habits here.
As we enter 2019, I’ve done some reflecting. I present to you, Critical-Chance’s year in review:
In February ’18, I launched the website.
By the numbers (2018):
Total Pageviews: 3,563
Video Views: 290
Newsletter Subscribers: 144
Ever wonder, “what do my friendships actually look like?”
We use math, and witty cartoons to describe the nuances of our relationships
Last year I read 20 books (+60% YOY). I attribute the increase to my growing travel schedule and the Amazon Kindle. Whenever I find myself mindlessly surfing social media, I whip out this bad boy and read information I’ve self-selected. It’s great, and I strongly recommend trying it if you haven’t. Sorry memes, you no longer receive all of my attention.
Parents have begun to over-shield their kids from harm. This has taught the most recent generation (Gen Z) to fear setbacks and ideology that goes against their personal beliefs. This is contrary to previous generations, “what doesn’t kill you makes you stronger,” tradition. Greg and Jon discuss how this mentality has flipped the way our academic institutions operate, and how it’s (likely) causing changes in the way we treat each other online and the rate of teen depression.
We are addicted to our technology; half of us would rather suffer a broken bone than a broken phone. Adam investigates the rise of our addiction, and explains why so many of today’s products are irresistible. Armed with the right knowledge and online tools, we can begin to leverage our phones to provide us more benefit than harm.
David Goggins went from an overweight, depressed kid to one of the toughest (physically and mentally) people in the world. Navy Seal Hell Week (3x), 100 mile marathon (18x) and Heart Surgery (2x), there isn’t an obstacle Goggins can’t overcome. Through his journey he learns that the most important voice is the one inside your own head. He’s evidence that when you embrace discomfort, you can achieve anything.
As Aristotle once said, “It is the mark of an educated mind to be able to entertain a thought without accepting it.” Part of my mission with Critical-Chance is to learn and evolve. I love finding unique ideas and viewpoints I haven’t heard of before. This is a deliberate focus of mine, because without entertaining new or opposing ideas, you’ll eventually plateau as a thinker.
three ideas I learned and entertained in 2018:
Success comes down to compounding
Everyone has heard of compounding interest in the context of money, but few consider how it reigns true across other domains in your life such as knowledge
Success is played at the margins (incremental improvement), are you getting 1% better everyday or 1% worse?
Time and attention will always be your most valuable resources, and unfortunately, 21st century business models rely on stealing these from you
Sometimes success is simply not getting distracted, and as society keeps relying on technology, this will become more and more true
New article coming soon =)
And finally, thank you. Thanks for the kind encouragement and detailed feedback. If you’ve subscribed to the newsletter, attended a lecture or even just read a single sentence, I appreciate your gift of attention and time. I’m excited to keep learning this year. As the curiosity train keeps trekking forward, thanks for reserving a seat on board.
Steve Jobs gave a commencement speech at Berkley in 2005.
By this time, Apple had become one of the most successful enterprises of the new Millennium. Jobs was famous for having a set of unique experiences – he believed these were critical in forming his opinions and ideas at Apple.
So how did he know that his past experiences would help create Apple?
Well, he didn’t.
Here’s Steve on predicting the future:
“You can’t connect the dots looking forward; you can only connect them looking backwards.
So you have to trust that the dots will somehow connect. You have to trust in something – your gut, destiny, life, karma, whatever.
This approach has never let me down, and it has made all the difference in my life.”
-Steve Jobs
From Apple to Chess
When I was a kid, Chess was one of my favorite games.
In Chess you spend most of your energy trying to guess your opponents next move. When they play a knight, your brain visualizes the new locations on the board. You work to understand the updated positions, as each move creates an entirely new game.
“How will this help or hurt me?” you wonder.
Well, Chess is shockingly similar to another game: the game of life.
Unpredictable Paths
Humans are terrible at seeing the future.
We tend to believe that our ability to predict leads to success, however that’s not quite true.
Preventing yourself from making a critical mistake allows you to keep playing the game, but it’s usually the unpredicted events which lead to your victory.
This is the same in businesses as it is in personal development. Odds are that a critical component of you (as you are today) did not exist when you first started. Whether that’s your newfound interest in running 5K races, or the way you pitch to clients.
With this hunch, The New York Times wanted to better understand which career paths most executives took before becoming CEOs.
After interviewing across all fields, one pattern emerged: there was no path.
From musical theater to religion, CEOs were less concerned about their current trajectory in the moment and more focused on learning from each experience.
“Rather than wondering if they are on the right career path, they make the most of whatever path they’re on, wringing lessons from all their experiences.”
Two weeks ago I had the opportunity to speak with student leaders at Vanderbilt University.
They gave me ten minutes and free range for topic, so naturally I chose Human Potential. Part of this lecture contains material from my happiness talk which I present at Google.
Check it out below, and if you enjoy, please subscribe for more.
Once upon a time, there was a young man who loved the outdoors, and aspired to own a farm one day.
But he grew up in the city where his still family lived, and he was expected to return.
After graduating from school, the man found a job in an office. The pay was reasonable, so he accepted.
“One day, I will build my farm.” he said.
With good fortune, the man was successful at work; promotions led to more responsibilities. More people depended on him at work, so he found it harder to leave.
“One day, I will build my farm.” he said.
The man fell in love and started a family. Ten years turned into twenty, which quickly became forty. One day the young man woke up and looked at himself in the mirror, he wasn’t so young anymore.
Soon after, he fell sick and passed away.
He was cherished and missed by many.
But nobody knew him as a farmer.
From starting a business to beginning a positive habit, we all have these aspirations, but we never start.
Take working out:
We all agree that doing 10 pushups is good for you
How long does that realistically take? Two, maybe three minutes?
If you did this everyday and added one pushup every few days, you’d be significantly stronger by the end of the year
Yet we never start, which ultimately robs us of our total potential.
“The willingness to start is the littlest thing in life that makes the biggest difference.
Life isn’t a dress rehearsal.
Only one person lives in the spotlight, but everyone benefits from stepping on stage.”
-James Clear
Take the first step today, and embrace your aspirations…
A wise man was once asked to share one piece of advice to a large group of people.
“When a wave comes, go deep,” he said.
The crowd stared back at him puzzled, so he continued.
“There are three things you can do when life sends a wave at you.
You can run from it, but then it’s going to catch up and knock you down. You can fall back on your ego or try to stand your ground, but then it’s going to clobber you.
Or you can use it as an opportunity to go deep, and transform yourself to match the circumstances… and that’s how you get through the wave.”
There will be times in your life where an unexpected event may happen. Your reality is changed, you may feel uncertain about how to move forward. During these times, there’s only one true way to get through:
Embrace the riptide and go deep.
Because when we match the depths of our challenges, we come out even stronger.
