Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 

What do the wealthy do that the people who are yet to be wealthy have not had the opportunity to do yet or do not understand? One of the most common things is compounding. What is compounding? Compounding is the premise that with time, certain things grow exponentially rather than linearly. If we want to be wealthier, we need to have more compounding in our life. There’s four places in which we can have more compounding in our life. We’ve got to understand what compounding is and how it works for us, and also understand its power, so that we’re more willing to undertake those activities, so we’re more willing to learn about it, because until we get how relevant it is, it’s unlikely that we’re going to do it. Before we talk about how we’re going to do something, we have to talk about why we’re going to do it, so that we get why it helps us, so we get why it’s useful. We need to explore compounding First of all. This is one of the most common things that I see in people who are wealthy. I see in their lives of the people who are wealthy. Now, it doesn’t always mean that they always understand it, it doesn’t always mean that they’ve always intentionally done it, but usually they have it in one form or another. In fact, always they have it in one form or another. They just don’t realize it. The difference is that when we know this stuff, that we can actively undertake activities in our life that will permit us to have more exposure to compounding, because we now get why it’s important and we can also intentionally set about undertaking those things so that we can have greater leverage, so that we can have greater wealth in our life. So in order to do that, we’ve got to understand the process of compounding and why it’s important, very, very, very, very useful whenever you get this stuff. Now, everybody knows about compounding in the sense that our money grows exponentially with time rather than linearly. Everybody knows that compounding trust is a thing. Let’s touch upon that and then we’ll touch upon the other areas in our life which kind of compounding as well, because people don’t always get that. It actually just doesn’t appear in finance. It appears in lots of areas. When you get this stuff, what it means is you can undertake intentional activities towards incorporating more compounding stuff in your life. That means that for every unit of input, you get way more output. People who are working harder do not necessarily rewind, so people who are earning more are not necessarily working harder. That is a key thing to understand. There is only 168 hours in a week. We can’t get anymore. Somebody who’s extremely wealthy doesn’t work 169 hours because that’s not possible. No, what they do is they get more out of each and every hour. We need to increase our leverage in order to do that. When we increase our leverage, what it means is fundamentally is that we get more output for every unit of input. Now, most of those things that increase our leverage actually compound with time, which is even cooler, because what that means is, for every unit of input, we get exponentially more output, which is flipping awesome. But we have to undertake activities that permit us to do that. In the first place. Let’s talk about compounding with relevance to finance super quickly at the very start, and then we’ll build on that concept because we can now understand how it applies in other areas of our life. First of all, compounding and finance. Most people know how this works. If you get to learn how this works, then this is going to be really cool. This is going to blow your mind, because people who human beings we are incredibly bad at understanding things that grow exponentially. We’re incredibly bad at understanding how the power of things growing exponentially, how beneficial it can be in our life, we understand way, way, way, way, way more easier things that are linearly growing, things that grow at a linear rate, a directly proportional rate. When you get that, there’s a subtle, hidden cognitive bias for us to not understand. Compounding you also get when most people don’t do it because they don’t realize how much it’ll help them. Let’s put some figures on it because that will allow us to understand. Here’s an example that I always use. There’s 10,000 pounds in a bank account and let’s say that it appreciates at a rate of 9% a year, and that can be because it’s invested in something. That can be because it’s in a high interest account. Whatever 9% high interest accounts can be pretty unlikely to get, but it doesn’t really matter. All we’re saying is that it appreciates at a rate of 9% a year and that 9% compounds with time. After year one we have 10,000 pounds. If it appreciates at a rate of 9%, then we’re going to have 10,900 at the end of year one. Then at the end of year two, we actually get 9% on the 10,900, which is going to be $980 or 980 pounds or 980 yen, whichever denomination of currency we decide it’s going to be 980, whereas the year before it was 900, 980-ish is in and around that. The point is that it’s more. Our final balance is going to be 11,890, which will gradually increase in the rate that it grows with time. Now that process is actually really, really, really powerful because with time it begins to grow exponentially. So after 40 years get this we’re going to have circa 300 grand in that bank account, and that’s without even contributing to it consistently. That’s just within the initial $10,000 and with it growing at a rate of 9% a year. Now, of course, we have to factor in inflation average of about 3%. So the real value of that 300k won’t be the same in today’s money, but it’s certainly going to be a lot more than what we would have had otherwise. It’s appreciating at a rate of 9%. Then the real in real terms, the real rate which is actually appreciating, is 9 minus 3, therefore 6. So 6% growth per year net, which is awesome. Now let’s take that exact same example 10,000 pounds, $10,000, 10,000 yen whatever in a bank account Now it’s appreciating at a rate of 10% a year. After that same period of 40 years, we’re now going to have 450k in that bank account. So we actually got 50% more because our rate of return increased by 1% per annum. That is a massive amount. Therefore, on our investment portfolios, we now understand that when we’re paying 1%-2% fee, that this can actually mean as much as 50% more money at the end of that 40-year investment period if we’re investing from the age of 25 to 65, which a lot of people are, because that’s about retirement age. So these are fairly representative of what something that someone might go through, a situation that someone might find themselves in. The difference between understanding how we can do it ourselves versus delegating it to someone else is often like 1-2%. We know with time that that actually adds up to a huge amount, because we now understand how important that is for us, because now we have some real figures, we are actually way more likely to go about the processes that we need to undertake in order to understand how we can invest and grow our money. Because those examples I didn’t just pull those numbers out of the air. They’re pretty representative of the difference that you can make in your life whenever you get this stuff. You’ve taken the time to understand investing and, as a result, you’re able to access more compounding in your life, which is the whole point of this podcast. So we know that it makes a huge difference. We know that it makes a huge difference with time. However, we don’t always undertake the activities that permitted in our lives. Usually, we will go to work, exchange our time for money continuously. There’s no compounding occurring there whatsoever. The only real rate of growth that we’re ever going to get is the rate of growth in our skills as a clinician, as a dentist, as whatever job we do, because that’s going to determine the level of remuneration that we receive. Now. They will grow with time. They will get better, they will increase and that’s cool. However, if that is the only area in our life in which something is increasing and growing exponentially, then really what we need is we need more areas of our life. It’s just like having more opportunities to grow. It’s like if you have a number of dices. If you only have one dice to roll, the odds of you rolling the six are much lower. If you have like 10 dices to roll, the odds of you rolling the six are much higher. The key thing to understand is that actually, it doesn’t necessarily take that much effort to have these compounding vehicles in your life. You just got to get what you need to do in order to achieve them. Don’t get me wrong it’s not easy. The thing about compounding is it’s really slow at the start and it speeds up towards the end. What are the other areas of life in which you can have compounding? Well, here’s the thing. There’s actually four. If we want to get scientific about this, if we want to get specific, what this will mean is that you can undertake these activities. You can pick which one of these four areas you want to have some more compounding in your life and then, therefore, you can have greater results. You can have more exposure to compounding. You can have more wealth, because that’s ultimately what it results in. And remember what I said earlier at the start the people who are richer, they’re not necessarily working harder. In fact, oftentimes they aren’t. Maybe they are at the beginning when they’re building these compounding vehicles. With time, they don’t have to, because for them, every unit of input gets so much more output, exponentially more output, and what that will allow them to do is generate a lot of wealth with not that much effort, and that’s a really, really, really cool thing to understand. So if you want more of that in your life you’ve got to have a combination any one or a combination of these four things. You’ve got to have more of these four things in your life. Very first one in which there can be more compounding in your life. Very first way that you can get more leverage human leverage. Naturally, if you hire someone to work for you and instead of having two pair of hands, you have six pairs of hands. Now they might necessarily replace you in your profession as a dentist, but they will be people that can work around you and help you achieve your goal and help you achieve the outcome that you need, help you achieve your objective. Obviously, the quicker that you can achieve your objective is the quicker that you can deliver value for someone else. The quicker you can deliver value someone else, there is more remuneration. If you’re a dental practice owner, the more things that you can delegate, the more things that you can pass off to someone else, the more people around you that can undertake these activities is the more time you will have, and it also gives you more leverage. It gives you more output per unit input. Of course, it’s not as simple as that. However, from a high level, having more humans in your life in which you can delegate tasks to, will mean that you have more leverage, will mean that you get more output per unit time. Obviously, you just have to work out the difference between how much you’re paying them and how much value the extra value that you’re creating. Providing that there’s a margin there, then what it will mean is that you will make more money. Of course, however, we’ve got to understand that that is a compounding area in our life and therefore, when we do that, we will have more compounding. The second area of which there’s compounding in our life I’ve already touched upon this is finance. That’s one of the most common places in which you can have compounding. When you invest your money and you do it properly, it will compound with time. Compounding is a function of two things. It’s a function of when we start the sooner we start, the better. The other thing that it’s a function of is the rate of appreciation. In the example that I just said earlier the 9% versus 10% thing the only thing that we modified was the rate of appreciation and it got 50% more of a result it got 50% more output over a period of 40 years. So these little tiny increments build up when you understand how you can do that yourself, you’ll have some compounding in your life. It just so happens that that’s quite a slow way to get compounding typically. So what a lot of people will do is they’ll concentrate all of their wealth and investing, which is fine. It’s not wrong necessarily. It’s just that it’s good to understand that there’s other areas in which you can get more leverage and therefore have more access to compounding. People talk about compounding in the financial world as if it’s the be all and end all, as if it’s the only way that you can get access to that. That’s what this podcast is about is to make you think to the next level. Everyone knows about compounding and investing or at least most people do and if we didn’t before this podcast, then you’ll know now, because of the examples that I said, just to understand, that there’s actually four places in which you can have compounding. Anybody who has more compounding in their life has more wealth, because they fundamentally have more output for every unit of input. So that’s the second area. The second area in which we can have compounding is finance. Most people think that’s the only area. Actually, there’s loads of ways, because, remember, all I’m doing right now is covering the four areas from a high level, and there is a myriad of possibilities in each and every one. However, in order for us to put some effort into each one of these areas, we’ve got to understand what they are first and understand how they appear in our life. Let’s go back to the human one really quickly. Most principles have leverage. Remember how I said that people don’t always understand that they have leverage in their life or compounding in their life. This is what I see all the time. Principle Dennis’s have leverage because they have other people in their lives. They just don’t always realise that they do, and what that will typically mean is they’re able to generate more money. Not always, of course. They have to get their practice running, and I get that. There’s a lot of things that you have to think about. There’s way more moving parts. As a principle, do totally understand that At least there is the scope to earn more. I’m sure everybody will agree with me. Third area in which you can have compounding in your life is media. Anybody who’s got a following out there? One of the easiest ways to have more compound and more leverage is media. It takes just as much effort to write a post that goes out to one person as it does to tens of thousands of people, it literally takes you just exactly the same amount of time. Naturally, with time, audiences tend to grow. They tend to grow on an exponential rate, which is awesome. Do not get me wrong. It is not easy to start an audience off. It takes a lot of time and at the very beginning it’s basically like you’re talking into a vacuum and you’re not getting anything back. There’s obviously going to be a lot of hit and hope. You don’t actually know if it’s going to work out. There’s a lot of fingers crossed situations. Whenever you get some traction and you’re consistent about your posting, it grows and grows and grows and grows. It takes years typically. It takes years and years and years to get to that point. However, one thing’s for sure if we don’t start, then the process never begins. When you get to the point where you have some leverage, where you get to the point that you have some followers, then naturally you’ve got more exposure, and what that would mean is that for every unit of input, you get way more output. For every post that you write, you’ll get way more exposure, way more eyes on it, and that can be something that you can use to help people. That can be something that you can use to grow a community. You’ve got to understand that. That is one of the four ways that you can get compounding in your life. It’s a really tough place to go. Lots of people find it really difficult to post videos of themselves and post a little bit of them out on the internet. However, when you do and when you get somewhere, it’s one of the four ways you can have more compounding in your life. Each one of these ways is linked to more wealth. Fourth way that you can have more component in your life is automation. What is automation? Automation is anything that you can delegate to a piece of software or a machine. So let’s, for example, say that I had some sort of manual task that I was undertaking every single day. If I could create a machine or software that does that for me, then naturally that will speed the process up. That will make things a lot more simple. That will make things a lot more convenient for me. Obviously, the more I can delegate to machines, the more I can delegate to automations, then the more I can get done per unit time. What’s a good example of that? A good example of software. A good example would be instead of us having to manually text every single patient in our database, we get software to do it for us, and what it will mean is you get the same output but with much less input, because you can do it like that rather than having to take some time. So the more things that you can delegate, automate or eliminate towards software and towards machines is the more efficiency that you have in your life. Now there’s oftentimes lots of situations where it’s not so straightforward for us to do that, because it requires some thinking and that’s what holds people back. However, the more we can embrace the fact that it takes a little bit of effort to delegate these things outwards, is the more we’ll ultimately get done per unit time, which means is the ultimately the more wealthy that we become. It’s all about incremental gains and incremental improvements. It’s all about incremental improvements and results. That’s what gets the big, big, big returns with time. Any person who has ever got wealthy on the face of this earth has used one of those four methods of leverage. If you get those four methods of leverage and you understand how they work and you begin to investigate them and explore them and how they can help you in your life, then you will become wealthy as well. When we say wealthy, we’re talking about a very specific term. The term wealthy means that you have time and you have money. That’s the cool thing. You can be rich, but not necessarily wealthy. Rich means that you have both. Can you get back your time? How can you get back the thing that is most precious in the whole wide world? You have to get more output per unit input. Fundamentally, there’s only four ways. Whenever you understand those four ways, you can begin to look for them in your life and incorporate more of them. Then what it will mean is that you have more time to do the things that you love versus things that you feel like you have to do, chores or things that you do not like. Ultimately, therefore, you get to reclaim your life and have more fun today.