Exponential Growth – A Miracle

In my days studying Economics we considered the views of Malthus who forecast that the world would run out of food because population was growing exponentially whereas the food supply could only grow in a linear fashion.

With exponential growth, the larger the quantity gets, the faster it grows. Think about that. One microbe in a jar divides into two, then four, then eight, then sixteen etc. So if it takes 10 days to half fill the jar, how long does it take to fill the jar? The answer is 11 days.

Do you see how, at every division, the number of microbes created is doubling? This is acceleration at an accelerating pace and is the principle behind nuclear fission. It is also called “compound” growth and Einstein, who knew a thing or two about nuclear fission, described it in terms of the greatest wonder in the world.

So, if you borrow to buy growth assets of $100,000 which grow at, say, 9 per cent compound (exponential) growth per year your asset will grow by $100,000 to $200,000 in 8 years and then by $200,000 in the next period and then by $400,000 and so on, and so on.

But, it gets better, because the interest you pay at, say, 9 per cent (linear) only costs just over 6 per cent when the average marginal tax payer (30%) claims it against their taxable income.

Any wonder that the smart people buy growth assets, and any wonder that they lever up the growth by borrowing, especially considering the government is so happy to encourage it with tax breaks? These tax breaks become more valuable, and the after-tax margin between the (linear) interest cost and the exponential (compound) growth rate grows greater, the higher the investor’s marginal tax rate.

Insecure people will focus on the negatives of borrowing, not on the positives of securing their future.

Certainly, life’s basic premise is that you win some and you lose some, but remember, in everything you do, “anything worth doing is worth doing poorly at first”. It is not possible to achieve bigger and better goals unless you are willing to perform poorly at first, because, it is not perfect practice that makes perfect but imperfect practice.

Nobody gets it right the first time. Fortunately, it is hard to lose with reasonable property even if you do it poorly, but you must be prepared to do it imperfectly until you reach the point when you can do it in an excellent fashion.

Yes, the future is a mystery, but there is absolutely no doubt that those who employ the principles of exponential (compound) growth will be far better off than those who don’t.

Source by Neil Handley

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