Underestimating the power of interest charging, driven by the tendency to intuitively think of exponential growth in linear terms.
IBM made a 3.5 megabyte hard drive in the 1950s. By the 1960s, the amount of data had shrunk to a few tens of megabytes. By the 1970s, the IBM Winchester disk contained 70 megabytes. Then the disks became exponentially smaller in size with more memory. A typical PC in the early 1990s was 200-500 megabytes in size.
And then ... bam. Things exploded.
1999 - Apple's iMac ships with a 6GB hard drive.
2003 - 120 gigs on Power Mac.
2006 - 250 gigs on the new iMac.
2011 - First 4 terabyte hard drive.
2017 - 60 terabyte hard drives.
Now put this together. From 1950 to 1990, we got 296 megabytes. From 1990 to the present day, we have received 60 million megabytes.
Compounding is never about being big. It is always - no matter how many times you study it - so big that you can hardly grasp it. In 2004, Bill Gates criticized the new Gmail, wondering why anyone would need a gigabyte of storage. Writer Stephen Levy wrote: "Although he possessed advanced technology, his mentality was based on the old paradigm of storage as a commodity to be preserved." You never get used to how quickly things can develop.
I've heard a lot of people say that when they first saw the compound interest chart - or one of those stories about how much money you would have for retirement if you started saving at 20 versus 30 - their life has changed. But this probably did not happen. This probably surprised them because the results didn’t seem to be correct intuitively. Linear thinking is much more intuitive than exponential thinking. Michael Batnik once explained this. If I ask you to calculate in your head 8 + 8 + 8 + 8 + 8 + 8 + 8 + 8 + 8, you can do it in a few seconds (that's 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (that's 134,217,728).
The danger is that when addition is not intuitive, we often ignore its potential and focus on solving problems in other ways. Not because we think too much, but because we rarely stop to consider building up.
There are over 2,000 books that tell how Warren Buffett made his fortune. But none of them are called "This guy has consistently invested three quarters of a century." But we know that this is the key to much of his success; it's just hard to comprehend this math because it's not intuitive. There are books on business cycles, trading strategies, and sectoral rates. But the most powerful and important book should be called Shut Up and Wait. This is just one page with a long-term graph of economic growth. Physicist Albert Bartlett said about this: "The greatest flaw of humanity is our inability to understand the exponential function."
The counterintuitive nature of compounding is the cause of most failed trades, failed strategies, and successful investment attempts. Investing well isn't necessarily about making the most of your returns, because the highest returns tend to be one-off hits that kill your confidence when they run out. It's about making a pretty good profit that you can stick with for a long period of time. That's when complexity grows.