Good things take time

I've long believed - or rather, I've known it to be true - that investment success or failure is entirely about the investor's psychology. We might say that so and so did badly because of wrong asset choices, mistiming the market or a bad economy, but those are just proximal causes, the symptoms. The root cause is always the investor's own mindset, knowledge and attitude. Of course, this is true not just in investing but in many other aspects of life.

In fact, it's genuinely fascinating how human beings can simultaneously know something to be true and yet act as if they don't believe it at all. Exercise is perhaps the most obvious example of this peculiar disconnect.

We all know - with absolute certainty - that regular, intense physical activity is essential for our health. The evidence is overwhelming, benefits are visible and the science is incontestable. Yet, how many of us consistently maintain a proper exercise routine? The gap between knowing and doing is surprisingly wide.

The same phenomenon plays out rather strikingly in the investing world, particularly regarding the power of compounding. Like exercise, compounding is one of those rare things in life that delivers precisely what it promises. It's not a marketing gimmick or a clever sales pitch - it's simply mathematics at work. The arithmetic of money growing upon itself is as reliable as gravity, yet our behaviour suggests a strange scepticism about its power.

Our cover story this month delves deep into the mechanics of compounding, but I find myself more intrigued by this question: Why do we resist something so obviously beneficial? The answer, I suspect, lies in how our minds process time. Both exercise and compounding share a crucial characteristic - the time delay between action and reward is substantial. When we exercise, we don't immediately develop a great physique. Similarly, when we invest, we don't see dramatic results in the first few years.

This delayed gratification is particularly challenging in today's world, where we've grown accustomed to immediate results. We can order a meal and get it delivered in minutes, stream any film instantly or have a package delivered the same day. This immediacy has perhaps dulled our ability to believe in processes that take time to show results.

But there's something else at play here - something more subtle. With both exercise and compounding, the early stages can feel unrewarding. The first few months of exercise often bring more discomfort than visible results. Similarly, the first few years of compounding can appear disappointingly modest. It's only after crossing a certain threshold that both begin to deliver results that feel proportionate to the effort invested.

The data in our cover story reveals this rather clearly. A monthly investment of Rs 10,000 takes almost a decade before the returns begin to overshadow the invested amount. This is precisely where most investors lose patience. They see the modest gains in the early years and conclude that the game isn't worth playing. It's exactly like someone giving up on exercise after a few months because they haven't become as fit as they wanted.

What makes this more interesting is how we overestimate what we can achieve in the short term whilst underestimating what's possible in the long term. We expect dramatic results from a month of exercise but fail to imagine how transformative a decade of consistent physical activity could be. Similarly, we're disappointed by a 10 per cent return in a year but fail to grasp how that percentage, compounded over 20 years, can multiply our wealth several times over.

Perhaps the solution lies not in more education - we already know these truths - but in developing a deeper belief in processes that take time. It's about cultivating the patience to allow compounding, whether in finance or fitness, to work its magic. After all, the best time to start believing in obvious truths was yesterday. The second best time is today.