How to compound yourself

One of the impactful blog posts I've ever read is by Sam Altman (former president of Y Combinator) on how to be successful. In the post, I think the most important of the 13 thoughts he listed is the first: "compound yourself."

It's been said many times before, but I think it's worth repeating that the human mind finds it naturally difficult to distinguish linear growth from exponential growth. Take the example of this blog. I started it about three weeks ago with one reader (my wife). Imagine for a moment that the number of people who read my blog somehow doubles each week. How many readers would I have in six months?

(The answer is over 67 million readers.)

I'm not saying that I can double my readership every week. I am saying that exponential opportunities are categorically different from linear ones, and we should heed Sam's advice to consciously and resolutely seek out the former despite the relative short-term attractiveness of the latter.

The classic example of a linear opportunity is the typical day job. We trade our time for money, and time only scales linearly. Furthermore, time is a resource that we cannot make more of, so it feels exceptionally bad to trade away (especially when we get older).

Unfortunately, one question that Sam does not answer at length is: how exactly do we compound ourselves effectively? He suggests that we should get leverage through capital, technology, brand, network effects, and managing people, but there's no discussion of specific examples or the relative difficulty of each method.

After considering this problem as rigorously as I could, I've collected my thoughts in the remainder of this post. To summarize, I will discuss the two broad ways to achieve compounding: leveraging skills that scale, and owning assets that grow exponentially in value. I will also propose my strategy for taking advantage of compounding as much as possible.

Skills that scale

The advantage of this type of compounding is it usually doesn't require us to have any resources (eg. money, network, experience) in the beginning - except the time to learn and master the skill in question.

Some skills that have the potential to scale exponentially (with the relevant profession in parantheses) include: sales (real estate agent, investment bank MD); management (corporate manager); content creation (author, musician); computer programming (software engineer); investing (fund manager).

Skills that are scalable create value in a way that's tied to the skill-user's ability rather than the skill-user’s time. The managing director at an investment bank and a used-car salesman are both salespeople, but the former makes perhaps a thousand times more money per sale than the latter. The level of skill mastery is completely different. My observation is that it seems worthwhile to learn and master scalable skills. Since the results scale, learning also scales.

Some skills that aren’t scalable (relevant profession in parentheses) include: driving a vehicle (Uber driver, truck driver); cutting hair (barber); woodworking (carpenter); car maintenance (mechanic); mixing alcohol (bartender).

Skills that aren’t scalable directly trade the skill-user’s time for each unit of value created. Your level of mastery of the skill will not have an exponential effect on the value you generate. Thus, mastering unscalable skills seems unproductive. There's probably little value in becoming the world's best Uber driver.

Assets that grow exponentially

Many assets grow exponentially in value, but certainly not all. For example, motor vehicles are assets, but they generally decline in value over time. Luxury items by definition cost a substantial premium over the market price for basic functionality but generally offer no additional potential for wealth generation.

Meanwhile, assets such as real estate, profitable and growing businesses, or shares in a publicly traded company grow exponentially in value - most of the time. The main risk of owning an asset is that its market value can fluctuate; sometimes, its price could go to zero (this could happen if it can no longer generate any wealth or if it's forcibly taken from you). The way to mitigate this risk is to diversify your holdings by investing in a range of asset types.

We can either buy assets with money or build them. One disadvantage of the former method is it requires us to have money to begin with. Meanwhile, building assets requires us to invest time, and the main risk is failure in generating any meaningful value.

Perhaps the most romanticized asset we can build is a startup. Another asset we could build is an audience for our personal brand, by leveraging platforms such as YouTube, TikTok, or Instagram. Finally, we could also generate intellectual property, which can be patented and licensed or distributed.

It seems that there's significant overlap between exponentially growing assets and scalable skills. For example, mastery of content creation gives us the means to generate intellectual property and perhaps build an audience. Having strong investing skills would help us to build a diversified and high-performing asset portfolio. Building a company likely requires strong management and sales skills, and possibly strong programming skills if it's a software startup.

It's worth noting that even unscalable skills could be combined with exponentially growing assets to drive growth. For example, the celebrity chef Gordon Ramsay has leveraged his mastery of an unscalable skill (cooking) into successfully building valuable assets (a growing audience and a global restaurant business). This can be done with virtually any skill; I recently came across a violinist whose YouTube channel has over 3 million subscribers.

Perhaps the least promising are depreciating assets. I still can't think of any systematic way to generate wealth with them, even indirectly.

Owning assets is the easiest way

The biggest and most compelling advantage of owning assets is its ease of execution; investing effectively requires a simple formula of capital, basic personal finance skills, and the patience to let compounding work its magic for us over the years.

All other paths to compounding returns present extraordinary challenges. Mastery of a skill requires innate talent and 10,000 hours of practice. A startup requires years of extremely hard work to reach an IPO, even when assuming it's among the 0.1% that do not fail. On average, it takes nearly 4,000 videos to reach 1 million subscribers on YouTube. And so on.

Meanwhile, each dollar we save and invest is like a little employee that duplicates itself every few years, never gets tired, and requires almost no supervision. Investing is like planting seeds that don't require fertile land, water, sunshine, or manual labor to grow, but still produce the fruits we want if we wait patiently.

There's just one little detail we need to work out. Investing requires us to have money, and to have money, we need to save money. As I discussed in another post, saving money is more difficult than it looks. (One effective way to start would be to identify all the depreciating assets around us and avoid buying them.)

Advice

How do we optimize for compounding? Below are what I believe to be the three most important actionable recommendations.

1. Save as much as you can, and make diversified investments with your savings. Begin by avoiding depreciating assets (ie. luxury items) and learning basic personal finance skills.
2. Choose a career that pays you to master scalable skills (content creation or programming if you prefer to build things; sales or management if you prefer distribution and interpersonal interactions).
3. If you have time for a side hustle, choose to build or create something (eg. a YouTube channel, a book). Unless you're desperate for income, avoid side hustles where you directly trade your time for money (eg. bartending, Uber driving).

For what it's worth, I'm following my own advice. I save over 80% of my income (still working on the diversified investing part), I'm operating a profitable business, and I've recently begun to create content and build an audience (eg. this blog!).