Exponential growth is one of the most powerful principals not only for mathematics, but for economics as well. You don’t even have to be a math genius to understand this concept because I will be telling you some stories that ring!
What is Exponential Growth?
From a very basic standpoint, it’s an elegant principle that states that ‘the bigger they are, the faster they grow’. The scope of applying this principle is vast, but we will mostly focus on how it applies to your net worth in this article.
When speaking of net worth, I’m sure you have heard of compound interest. If you haven’t, then here is a brief example of what it is. Let’s say, for example, that you have allocated $100 in an account to earn 10% compound interest each year. The First year you will get $10, so now you have $110 in your account. The next year you’ll get $11 (which is 10% of $110), and now you have a total of $121 in your 2nd year! So on and so forth. When the time is long enough, this type of exponential growth will make you a ton of money (if you have a little patience)!
To simplify, let’s look at a graph and plug in the formula for exponential growth.
The magic formula for exponential growth is y = a(1+r)x
Here y represents the total amount, a is whatever amount you start with, and r is the rate at which it will increase. For instance, it will increase at a rate of 10% a year. Lastly, x is obviously the time or interval that has passed (in this case it is years). So there you have it, this is what a typical exponential growth graph looks like.
Now that the hard but essential part is out of the way, let’s look at how this affects our daily lives.
Exponential Growth explains the future of technology
Have you ever noticed how fast we are progressing in terms of technological advancement? It seems only yesterday when flip phones were all the rage and 3G was the fastest network. Nowadays, a smartphone has more computational capabilities than your average satellite! Before the industrial revolution, decades would pass from one technological invention to the next. How did this happen so fast? An observation, known as the Moore’s law, may be able to explain this phenomenon.
The Moore’s law predicts that every two years, our computer power doubles. In 1965, Gordon Moore, who is the co-founder of Intel, observed that every year the number of transistors doubled since the first integrated circuits were invented. In the year 2000, your average CPU had 37.5 million transistors which had risen to a whopping 904 million in just 9 years. Nowadays if you’ve gone out to buy a laptop or computer, I’m sure you have heard of QUAD CORE processors. So if it says 2.8 GHz Quad Core, you multiply it by 4 and you get a whopping 11.2 GHz! So, you don’t really have to know Moore’s Law to see that technology has advanced exponentially in a short amount of time.
The Exponential growth curve above shows computer power versus time. Since 1988, computational power has increased exponentially to about 130,000 times more than what it was.
Exponential Growth is the key to Human Evolution
The Human Genome Project is one of the greatest scientific leaps made by mankind. With it we have been equipped to solve some, if not all, of the best kept secrets of our race. In case you didn’t know about it, the goal of the research was to sequence the entire human DNA in order to map all of its genes to understand both their physical and functional purposes.
The project started in 1990 and ended in April 2003. In the 90s, scientists did not possess the advanced sequencing capabilities that we possess today. Sequencing DNA was a grueling, labor intensive, and time consuming process. This is why it took scientists 7 years to decode just the first 1%! However, it took only one year to sequence the next 1%. Remember, Moore’s law? It not only applies to computer chips, but also to technological advancement as a whole. As technology advanced, it took scientists even lesser time and the Human Genome project accelerated at an exponential rate. In the next year, the pace doubled again as sequenced DNA jumped from 2% to 4%. The trend continued and the project is completed within 15 years. In fact, 99% of the project was done in about half that time.
Exponential Growth is Warren Buffett’s best friend
Warren Buffett is the most influential investor of our time as well as being the richest. His net worth is currently $66.7 billion! However, he didn’t become rich overnight. Warren Buffet believes in the value of exponential growth and long-term investment. By being patient and only investing in trades which he understood, he managed to inflate his net worth exponentially from 1958 to 2014.
He understood that a company with sustainable profits compounds their dividend and that getting into a long term relationship with them gives you exponential growth of income. With a process called dividend compounding and given enough time, anyone can be a millionaire. It’s kind of like the compound interest we talked about earlier, but instead, you reinvest your dividend into a company with sustainable growth.
Reinvest your dividends and profits. It is one of the most popular methods used by highly successful investors because it follows the rule of exponential growth. This process is very time consuming though, which also explains why Warren Buffet made 99% of his wealth after his 50th birthday.
Fast wealth is created exponentially. Thanks to the effect of compounding interest, becoming rich is not such an elusive dream. Think about it as fighting gravity. A rocket ship uses most of its fuel to just escape earth’s gravity. Once you get away, your speed will become exponential. So, start making your wealth to grow exponentially now!