Student: If we make efforts and our efforts keep compounding, can’t we have all we want in life.
Teacher: We cannot have all that our mind may conjure up in the form of desire.
Student: Why?
Teacher: The concept of compounding hits the concept of ROI Walls, and the concept of finite time in life. Much like the battle between a powerful force against a heavy object in its path. Because resources on this blue rock that’s floating through space, are finite and many are competing for them.
Student: Why can’t I compete and win too?
Teacher: Certainly, you may try. Sometimes, you may win. Sometimes, you may be placed second, or third or nth. But, have you thought about opportunity costs and return on investment walls?
Student: No sir, please enlighten me.
Teacher: The return on investment on your trying to compete, may or may not be high enough, compared to the time you are investing. Opportunity costs are the costs of not doing something else with your time and energy.
Student: Doesn’t this sound like advice for consoling a loser.
Teacher: We are all winners sometimes, and losers at other times.
Student: What does that mean?
Teacher: We all have finite time alive on earth, and hence finite energy. When we try to achieve something, we may achieve it and it may be ours for a while, but achieving it again and again, keeping it, takes up energy. Like the title of the best athlete in a sports league, is not held by one person at all times.
Who happens to be the richest person in the world keeps changing, so does the most profit making company. As times change, entropy kicks in, random events distort reality and also what we have achieved and acquired till now in terms of resources.
Student: I am understanding…
Teacher: What’s more, there are ROI walls. Do you think the number 1 company on planet earth will always remain number one?
Student: No.
Teacher: Why not?
Student: Because I understand that one day even the earth itself will be no more.
Teacher: Good. Everything is going to end, but I mean something more immediate than the end of earth here. I mean entropy, randomness, random events, new ways of doing things, all these things happen, continually. Hence, if an organization does not adapt and innovate, it will soon lose its return on investments. In other words, it has hit a “return on investment” wall.
Student: Yes
Teacher: This concept of a Return on Investment Wall – ROI Wall is applicable in our daily lives as well.
Student: How so?
Teacher: If you are exercising, you reach your peak physical shape at one time and then you hit the wall. You can’t go beyond, no matter how hard you try. If you are a chess player, you will hit the biological, neurological wall of improvement. You will reach your peak performance and you can go no further. You would have hit your ROI wall. No amount of extra effort is going to make you better and better. Compare this with the very first days/years of your improvement. You would have improved massively at the start. Hence the popularity of the term “newbie gains”.
Student: I am starting to get the hang of it…
Teacher: You see now that we are here to rent out our time anyway, and hence we would rather receive the highest return on investment on our time.
Student: Yes I see now.
Teacher: What works for you to go from zero to hundred, may not work when you try to go from 100 to 1000. Or from 1000 to 10,000 and so on.
Student: Please explain more.
Teacher: Consider a shopkeeper. He just establishes one shop and starts selling good from it. He is able to make a decent living, sets up a routine of managing the shop and is reasonably happy. Do you see that he is now earning much more than if he would have, had he not set up the shop? So setup up his shop was very good return on his investment for him, isn’t it so?
Student: Yes.
Teacher: Now imagine, if the same shopkeeper were to actually try and expand to more shops thinking this worked. The barriers he now faces are the barriers to scaling – namely competition, capital, systems, trained labor (others aren’t going to work as hard or diligently as he is because of the principle-agent problem), availability of land, marketing expenses if any and thus he may only increase his own woes and worries disproportionately compared to the excess return he may get from trying to expand further. What’s more, random events may close his other branches down and may not allow him to expand and scale further.
Student: Yes I understand. For instance, a pandemic may hit and his return on his investments may become lower.
Teacher: We can only but create order for a while in some domains and disciplines in life and achieve what we want to achieve in that time when order has been created by us, around us. Thus all companies on this planet earth, must eventually fail, all stocks & investments will eventually go to zero. We are all renting our time from life.
Student: Although this all seems pessimistic, I see now the truth in it.
Teacher: The idea is of acceptance, which sets us free. Thus, the idea of financial success is to try and achieve high returns on lower investments of time, energy, capital. And once one avenue is exhausted, we may want to move on to the next avenue of achieving higher return on investment.
Student: The highest return on investment is never achieved from one venture at all times. Am I correct sir?
Teacher: Yes you are correct, and the temporarily successful entrepreneur or the pro athlete, who reach the peak of their performance, if they don’t understand this fact and hence if they don’t diversify their financial success, in case of not being able to predict the next winners and invest wisely in case they can foresee the next winners, then they too shall fall from grace.
Student: Yes I see now why we can’t always win, continually.
Teacher: Understanding the concept of the finitude of our life and that of ROI Walls, helps us navigate better and change directions when we hit an ROI wall in life.
Student: But isn’t changing careers often generally a bad idea?
Teacher: It is because you lose the benefits of compounding your effort and knowledge in that field.
Student: So what should one do?
Teacher: Stick with a field or two as your primary source or income, preferably fields that you can work long term in as per your likings and those that have financial prospects meaning other people want what you produce as output, and then invest your excess gains in the stock market. If you can pick winner stocks, invest in winner stocks or else invest in an index fund w/o trying to time the market.
That way, when you earn more than you need, you can be rest assured that you have done your best to invest well which will produce the most optimal return over time wrt your knowledge level in the field of investing.
Student: I see. But isn’t it so that even the stock market may be risky?
Teacher: It’s the best that there is, else you always have fixed deposit schemes for trying to preserve your savings. But over a long enough period of time, index funds will outdo fixed deposits. Time is the friend of equity investments, especially the friend of the good companies.
Student: I see. I also see why I need to accept the truth as is.
Teacher: Acceptance of reality liberates us, because that is the truth of life for most humans. Not all of us can have all that we want at all times. We can have some things, sometimes. Acceptance, keeps your mind happy, and at peace.
Student: Yes, I think I am at peace presently.
