Our Brains Underestimate How Fast Money Grows
Computer storage gained 296 megabytes from 1950 to 1990, then 60 million megabytes since, and your retirement account works the same way.
Collaborative Fund · The Psychology of MoneyDo this math in your head: 8 plus 8 plus 8 plus 8 plus 8 plus 8 plus 8 plus 8 plus 8. You get 72 in a few seconds. Now try 8 times 8 times 8 times 8 times 8 times 8 times 8 times 8 times 8. The answer is 134,217,728, and your brain stalls long before you get there.
That stall is the trap. The example comes from Michael Batnick, an investment writer, who uses a simple math quiz to make the point. Addition grows in a straight line, one step at a time. Multiplication builds on itself, so each step makes the next step bigger. Money that compounds works the second way, with returns earning their own returns, year after year.
Computer storage shows how strange that feels. In the 1950s, IBM offered a hard drive that stored just 3.5 megabytes. By the 1970s, one of its models stored 70 megabytes. A typical personal computer around 1990 stored a few hundred megabytes. Then growth piled on growth: Apple's iMac came with 6 gigabytes in 1999, and by 2017 there were 60 terabyte drives.
Add it up and the pattern is startling. From 1950 to 1990, capacity gained 296 megabytes. From 1990 to today, it gained 60 million megabytes. In 2004, Bill Gates questioned why anyone would need a gigabyte of storage for the new Gmail. As author Steven Levy wrote, "his mentality was anchored in the old paradigm of storage being a commodity that must be conserved."
Investing trips us up the same way. More than two thousand volumes try to explain Warren Buffett's success. But none is called "This Guy Has Been Investing Consistently for Three-Quarters of a Century," even though time is the key. As physicist Albert Bartlett put it, "The greatest shortcoming of the human race is our inability to understand the exponential function."
The takeaway is humbling, and practical. Doing well has less to do with chasing peak gains, since spectacular wins are often one-offs that leave you shaken when they fade. It is about pretty good returns you can stick with long enough for compounding to grow very large.
Questions people ask
How long does it take for compounding to feel big?
It takes decades, not months. In the early years the gains look small because the base is small, and the huge numbers only appear after growth has had time to build on growth. That is why starting in your 20s can matter more than earning higher returns in your 40s.
Does starting early beat finding the hottest stock?
Often, yes. A smaller return held for a very long time can beat a spectacular return held briefly, because the long stretch gives multiplication more turns. That is why consistency, low fees, and avoiding ruin can matter more than picking winners.
What counts as a pretty good return I could actually stick with?
There is no single number. A pretty good return is one from a broad mix that you can stick with through crashes and flat stretches, without borrowing too much or bailing out. The exact average depends on what you own and when, which is why endurance matters more than reaching for the maximum.