IBM made a 3.5 megabyte hard drive in the 1950s. By the 1960s things were moving into a few dozen megabytes. By the 1970s, IBM’s Winchester drive held 70 megabytes. Then drives got exponentially smaller in size with more storage. A typical PC in the early 1990s held 200-500 megabytes.

And then … wham. Things exploded.

1999 – Apple’s iMac comes with a 6 gigabyte hard drive.

2003 – 120 gigs on the Power Mac.

2006 – 250 gigs on the new iMac.

2011 – first 4 terabyte hard drive.

2017 – 60 terabyte hard drives.

2018 - 100 terabyte Nimbus Data ExaDrive

Now put it together. From 1950 to 1990 we gained 296 megabytes. From 1990 through today we gained 80 million megabytes.

The punchline of compounding is never that it’s just big. No matter how many times you study it, it's so big that you can barely wrap your head around it. 

In 2004 Bill Gates criticised the new Gmail, wondering why anyone would need a gig of storage. Author Steven Levy wrote at the time, “Despite his currency with cutting-edge technologies, his mentality was anchored in the old paradigm of storage being a commodity that must be conserved.” 

You never get accustomed to how quickly things can grow.

I have heard many people say the first time they saw a compound interest table – or one of those stories about how much more you’d have for retirement if you began saving in your 20s vs. your 30s – changed their life. But it probably didn’t. What it likely did was surprise them, because the results intuitively didn’t seem right. Linear thinking is so much more intuitive than exponential thinking. 

If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728).

The danger here is that when compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.

There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.” But it's the key to the majority of his success; it’s just hard to wrap your head around the maths because it’s not intuitive. 

There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called “Shut Up And Wait.” It’s just one page with a long-term chart of economic growth. 

Albert Bartlett the Physisist put it: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

This inability to understand compounding is responsible for the majority of disappointing trades, bad strategies, and successful investing attempts. 

Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that kill your confidence when they end. It’s about earning good returns that you can stick with for a long period of time. That’s when compounding runs wild. Especially if you leave it alone.