Confounding Compounding
심영독
반 번호 이름
∎ Before reading,
Word Meaning
1. v. confound
2. v. compound
3. a. absurd
4. v. stagger
5. a. ravenous
6. v. exacerbate
7. v. defy
∎ While reading,
underline the key words or phrases.
Confounding Compounding
: $81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday.
Our minds are not built to handle such absurdities.
Lessons from one field can often teach us something important about unrelated fields. Take the
billion-year history of ice ages, and what they teach us about growing your money.
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Our scientific knowledge of Earth is younger than you might think. Understanding how the world works
often involves drilling deep below its surface, something we haven’t been able to do until fairly recently.
Isaac Newton calculated the movement of the stars hundreds of years before we understood some of the
basics of our planet.
It was not until the 19th century that scientists agreed that Earth had, on multiple occasions, been
covered in ice. There was too much evidence to argue otherwise. All over the world sat fingerprints of a
previously frozen world: huge boulders strewn in random locations; rock beds scraped down to thin
layers. Evidence became clear that there had not been one ice age, but five distinct ones we could
measure.
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The amount of energy needed to freeze the planet, melt it anew, and freeze it over yet again is
staggering. What on Earth (literally) could be causing these cycles? It must be the most powerful force
on our planet.
And it was. Just not in the way anyone expected.
There were plenty of theories about why ice ages occurred. To account for their enormous geological
influence, the theories were equally grand. The uplifting of mountain ranges, it was thought, may have
shifted the Earth’s winds enough to alter the climate. Others favored the idea that ice was the natural
state, interrupted by massive volcanic eruptions that warmed us up.
But none of these theories could account for the cycle of ice ages. The growth of mountain ranges or
some massive volcano may explain one ice age; it could not explain the cyclical repetition of five.
In the early 1900s, a Serbian scientist named Milutin Milanković studied the Earth’s position relative to
other planets and came up with the theory of ice ages that we now know is accurate: The gravitational
pull of the sun and moon gently affect the Earth’s motion and tilt toward the sun. During parts of this
cycle—which can last tens of thousands of years—each of the Earth’s hemispheres gets a little more, or
a little less, solar radiation than they’re used to.
And that is where the fun begins.
Milanković’s theory initially assumed that a tilt of the Earth’s hemispheres caused ravenous winters cold
enough to turn the planet into ice. But a Russian meteorologist named Wladimir Köppen dug deeper into
Milanković’s work and discovered a fascinating nuance.
Moderately cool summers, not cold winters, were the icy culprit.
It begins when a summer never gets warm enough to melt the previous winter’s snow. The leftover ice
base makes it easier for snow to accumulate the following winter, which increases the odds of snow
sticking around in the following summer, which attracts even more accumulation the following winter.
Perpetual snow reflects more of the sun’s rays, which exacerbates cooling, which brings more snowfall,
and on and on. Within a few hundred years, a seasonal snowpack grows into a continental ice sheet,
and you’re off to the races.
The same thing happens in reverse. An orbital tilt letting more sunlight in melts more of the winter
snowpack, which reflects less light the following years, which increases temperatures, which prevents
more snow the next year, and so on. That’s the cycle.
The amazing thing here is how big something can grow from a relatively small change in conditions.
You start with a thin layer of snow left over from a cool summer that no one would think anything of,
and then, in a geological blink of an eye, the entire Earth is covered in miles-thick ice. As glaciologist
Gwen Schultz put it: “It is not necessarily the amount of snow that causes ice sheets but the fact that
snow, however little, lasts.”
The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.
If something compounds—if a little growth serves as the fuel for future growth—a small starting base
can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you
underestimate what’s possible, where growth comes from, and what it can lead to.
And so it is with money.
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More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are
wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a
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good investor, but being a good investor since he was literally a child.
As I write this, Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after
his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.
Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to
investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters
of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever
heard of him.
Consider a little thought experiment.
Buffett began serious investing when he was 10 years old. By the time he was 30, he had a net worth
of $1 million, or $9.3 million adjusted for inflation.
What if he was a more normal person, spending his teens and 20s exploring the world and finding his
passion, and by age 30 his net worth was, say, $25,000?
And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to
generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his
grandkids. What would a rough estimate of his net worth be today?
Not $84.5 billion.
$119 million.
99.9% less than his actual net worth.
Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his
pubescent years and the longevity he maintained in his geriatric years.
His skill is investing, but his secret is time.
That’s how compounding works.
Source: The Psychology of Money by Morgan Housel
∎ After reading,
solve the following questions.
Q1. Complete the table below to explain the causes and mechanisms of ice ages. Fill in the blanks using
the exact words or phrases from the text.
Key Arguments
Scientist / Subject
& Scientific Discoveries
Milutin Milanković
[The Cause of Cycles]
- The ( ) gently affect the
Earth’s motion and tilt toward the sun.
- This orbital tilt shifts the amount of solar radiation each hemisphere gets
over tens of thousands of years.
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[The Real Culprit]
Discovered a fascinating nuance:
- ( ), not cold winters, were the icy
Wladimir Köppen culprit.
[The Process]
- It begins when a summer ( ) to melt the previous
winter’s snow.
- The leftover ice base traps more snow, reflects sun's rays, and
( ).
- Eventually, a seasonal snowpack grows into a ( ).
Gwen Schultz
[The Core of Compounding]
- Stated that: “It is not necessarily the amount of snow that causes ice
sheets but ( ).”
Q2. Based on the cyclical nature of ice ages described in the text, what important lesson can be learned
about growth and compounding? ( )
a) Large, sudden changes are required to create significant results.
b) Small, persistent changes can lead to significant outcomes over time.
c) It is impossible to predict how minor events affect future outcomes.
d) Growth and decline happen randomly without a pattern or cause.
Q3. What is Warren Buffett’s “secret” to his extraordinary financial success?
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