Morgan Housel is one of the best financial storytellers of our time. His book, The Psychology of Money, stands out as a classic in a category flooded with subpar books, bad advice, and worse writing. In it, Housel explores the intersection of psychology and finance, offering invaluable insights into how our emotions and biases shape our financial decisions.

Perhaps I have an affinity for Morgan because he’s as obsessed with compounding as I am. Or maybe it’s that he, too, likes to draw from outside areas to make sense of markets and investing. He pulls from history, psychology, and personal anecdotes to illustrate financial principles in a way his readers understand. 

Either way, I enjoy Morgan and listen to him whenever I can. I recently heard him casually describe compounding as “returns to the power of time.” Bingo. 

This straightforward, formulaic view of compounding gets to the core of an idea that is remarkably simple yet often elusive to many. While returns are an important element, it’s the exponent—time—that truly makes the difference.

In mathematical terms, an exponent represents the power to which a number is raised. For instance, in the expression 𝑎^b, 𝑎 is the base, and b is the exponent. The exponent signifies how many times the base is multiplied by itself. 

In this formula, the base (𝑎) represents the results of small, consistent actions we take every day — the investments we make in ourselves, our money decisions, our habits, and our relationships. These actions may seem insignificant in the short term, but they form the foundation for future growth.

The exponent (b), on the other hand, represents time. It is the power of time that transforms small actions into remarkable outcomes. By staying committed to our goals and persevering through challenges, we allow time to work its magic and unlock the exponential growth potential of compounding. The longer you let your investments grow, the more powerful the effect of compounding becomes. Over decades, the returns on your investments don’t just add up — they multiply, leading to substantial growth.

Whether you’re starting your investment journey at 20 or 50, the principle remains the same: the sooner you start, the more you benefit from the power of time. The best time to plant a tree may have been 20 years ago, but the second best time is now. 

Just as the formula for compounding requires both a base and an exponent, success in investing and life requires a combination of consistent action and patience. We must be disciplined to show up every day and put in the work, even when results are not immediately visible. At the same time, we must cultivate the patience to trust in the process and allow time to amplify our efforts.

The beauty of compounding lies in its simplicity and power. By embracing the concept of compounding, we can transform not only our financial strategies but also how we approach our personal and professional lives. Who knew that a little bit of math could be the secret to unlocking life’s greatest successes?