In the previous article, I shared the three abilities Naval emphasizes: attention and judgment. Next comes a much bigger topic—leverage. However, before discussing leverage, we need to address another concept first. In my view, the two form a pair; separated, their effectiveness diminishes significantly. That concept is compounding.
What Truly Transforms a Life
In films, we constantly see exaggerated plots: a hero suddenly acquires a superpower, or the story reverses dramatically at the very last moment. We fantasize that life changes through dramatic events, expecting everything to improve overnight. Reality, however, is usually the opposite.
What truly transforms our lives are the consistent, unremarkable, day-after-day small correct decisions that accumulate over time. That is the essence of compounding: a result becomes the base for the next round of accumulation, and the process repeats.
Compounding is a financial term, but it applies to every aspect of life—relationships, knowledge, reputation. Take knowledge as an example.
The Compounding of Mental Models
Charlie Munger introduces the idea of “mental models” in his writings. He represents a classic multi-disciplinary model thinker. These models include game theory, economic theory, physics, Eastern and Western history, philosophy—disciplines that have been validated over long stretches of time.
When I first read Poor Charlie’s Almanack, I did not understand what he meant by mental models. Later, I realized that people like him—practitioners, autodidacts, individuals with deep life experience and wisdom—approach the world with a modular mindset. They treat the elements that make up a person and their thinking as detachable and recombinable modules. Just as organs can be seen as components, thinking itself can be deconstructed. Different disciplines represent different cognitive modules. When needed, you can draw upon any of them—even if they are, to some degree, incompatible.
Contradiction does not mean mutual exclusion. The human world is inherently full of paradox. This is a kind of sacred duality. Standing in different positions leads to opposing views on the same issue—and a person is capable of holding multiple positions simultaneously.
Exponential Growth Is the True Magic of Compounding
When you possess diverse mental models—like Charlie Munger or Naval—these modules interact and compound, shaping an increasingly accurate understanding of the world. As new models are added, they compound again with the existing ones. The outcome is not linear, not 1 + 1 = 2. It is exponential. Exponential growth is the true magic of compounding.
We are educated in linear thinking: 1 + 1 = 2. But in the real world, one man plus one woman may result in more than two. Because of this linear conditioning, we assume that what we see now will simply continue in the same direction. The good will only get better; the bad will only get worse. A plunging stock will fall even further tomorrow. As a result, people often give up right before dawn—just before the light appears at the end of the tunnel.
Persisting Is Not the Same as Being Right
You might ask me, “Chan Peng, does that mean persisting is always correct?” No. Naval writes: “In the age of leverage, one correct decision is worth ten thousand hours of blind hard work.”
This once again highlights the value of judgment. Many people, after years of persistence, have already ruined the situation. Or they have struggled for years in a swamp that has long lost its nutrients, yet refuse to leave. This reflects the economic principle of sunk cost—and a fundamental test of human nature. Because you cannot bear to abandon what you have already invested, you force yourself to remain on a sinking ship, ultimately going down with it.
As an artist, if you have spent ten years in a place that clearly shows no compounding effect, you should exhaust every effort to find an environment where compounding can operate—rather than allowing your talent to dissipate there.
It seems the topic of compounding is not yet finished. In the next piece, I will discuss three forms of compounding more important than money: skills, trust, and brand. Is your environment amplifying you—or draining you? Until next time.
