Moving up the curve: Are you chasing diminishing or compounding returns?

Humans project our progress out linearly, assuming next week or next year will look similar to last week or last year. But our brains have it wrong. Progress is curved.

Our human brains are wired to think progress is linear. 

We couldn’t be more wrong. 

Progress is not a straight line

‘30kg on your first day. Pretty good start,’ my CrossFit coach was teaching me the basics of the clean and jerk Olympic lift. 

‘Thanks,’ I said. ‘It’s complicated.’ My brain was spinning trying to keep all the cues straight in my head. You take the bar from the ground to your shoulders, while squatting, then stand up, then get it overhead whilst leaping into a lunge. The best athletes in the gym made it look smooth and easy. 

‘Pull faster from the floor,’ was my coach’s instruction the next day. I sped things up. And I hit 35kg. 

‘Keep the bar closer to your body. It has to brush your hips on the way up.’ 40kg by the end of the week. 

‘Drop lower into the lunge on the jerk,’ he told me next week. 45kg. Every week I added more technique. And more weight. 

‘Elbows through faster on the turnover. That’ll help you catch the bar on your shoulders.’ 50kg. 

My coach is a rockstar.

But he’s not magic. If I’d continued adding weight at that rate, then after the decade I spent training the clean and jerk I’d be able to lift about 3200kg (roughly 1 hippopotamus, 2 cars, or strangely enough the tongue of a blue whale). 

‘‘Extra effort’ in whatever form it takes (mental, physical, emotional) cannot be sustained without eventual damage and diminishing returns.’ ~ Bill Walsh

I capped out at a personal best of exactly 100kg. The world record for women in my weight class is 154kg. 

This is diminishing returns - where the rate of return slows the more time, effort, or resources you add.  

I think it’s a universal experience in every family that Monopoly leads to screaming, hair pulling, and in one infamous case in my home - my brother kicking a hole in my door after I slammed it in his face. 

Mum hid the Monopoly set. Instead family game night consisted of a board game that simulated investing. Draw a good card, and you’d have the chance to ‘buy’ shares at the bottom of the market. Draw an unlucky card and you’d be forced to spend your cash on a ‘doodad’ - an expensive boat or car that did nothing but depreciate. 

So at age 17, when I won a $2000 prize from the Australian government for being a top student, I didn’t buy a doodad. And I wasn’t interested in saving for property Monopoly style. 

I bought shares. 

My grandfather helped me set up my first trading account. 

And each year, when I had small bonus from work, or a generous birthday gift, I would buy more shares. 

A decade later, when I wanted to use the money for the deposit on my first home, I didn’t have $20,000 in my account from depositing money each year. 

I had $32,000. 

‘Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.’ ~ Albert Einstein

If I’d kept that up for another 30 years, I wouldn’t have $80,000. I’d have over $600,000. 

This is compounding returns - the rate of return increases the more time, effort, or resources you add.

Both diminishing returns and compounding returns are concepts from economics (yes, there will be charts) AND they apply to life. Especially when we are talking about progress. 

Is what you are working on a pursuit of diminishing or compounding returns?

One is not worse than the other, but being aware of which path you are on:

• Allows you to set more accurate goals and plans over the long term

• Gives you emotional stability as you hit an inflection point where progress either slows or accelerates

• Helps you decide when to keep pushing through, or when it may be time to move onto another pursuit

Diminishing returns

Imagine it’s the 1700s and you’re a farmer with a single large field. Each day you go out and plant a few rows. It’s back breaking labour, and no matter how many hours you work, you can’t finish the whole field before the season turns. You produce 1000 carrots. 

Next year, you hire a 3 more people to help you, and you manage to plant most of the field. You produce 4000 carrots! 

Thinking to follow the same logic, the next year you hire another 3 people to help you. And yet you only produce 5000 carrots. What happened? 

In the beginning, more people (or more fertiliser, more sun, more water, more seeds etc) produces tons more carrots. But the more inputs you add, the fewer additional carrots you get. Those extra people you hired most sat around with nothing to do. 

This is the original way economics described diminishing returns. (Apologies to any carrot farmers out there as I know I’m totally making up yields).

Diminishing returns - where the rate of return slows the more resources you add.  

What activities are you doing today with diminishing returns?

1. Skill based activities - learning a new sport, studying a language, picking up a musical instrument. Like lifting weights, the better you get, the harder it becomes to get better. 

2. Knowledge within a field - the first book on a topic is enlightening, the 20th you may only find a few sentences add new value.

3. Marketing spend - the first $100 you put into social media ads allows you to select a really niche audience. The more money you put in, the broader your audience necessarily gets, and the lower your average click through rates.

4. Personal productivity - the people who are world-class at deep work can only manage 4 hours a day. Then there’s a few hours of admin. If you start trying to work 20 hours a day you’re not much more productive than the person doing 10 hours a day. 

5. Scaling companies - as a startup founder, the first person you hire has a massive impact on how much work gets done. When you have 30 people and you add one more, their impact is less noticeable and requires a bit more bureaucracy to manage. When you have 180k like Google…

6. Making money - dollars definitely make us happy, up to a certain point. Daniel Kahneman says this point is around $75,0000 per year. My magic number is a little higher (airline tickets aren’t cheap and travel = happiness)

The #1 question to ask: When should I stop?

We have an obsession with growth, and hustle culture. ‘More is more’ may as well be the motto for our generation. 

But, if you’re working on something with diminishing returns, then there comes a point where the amount of effort, time, or resources you have to add to keep improving is no longer worth it.

This point is pretty obvious when you’re tracking the data. Marketing dollars in, number of customer signups on the other end. It’s less obvious for skill acquisition, particularly when we have a culture of ‘never give up’.

The rule of thumb I use for thinking about improvement, is that with focused effort (that means hours of effort, every single day), you can be the top:

• 20% in the world, in 6 months

• 10% in the world, in 1 year

• 1% in the world, in 5 years

• 0.1% in the world, in 10 years

• #1 in the world, in 15 years (although you also need some luck or great genetics)

This played out pretty accurately for my beach volleyball career. I trained ~8 times a week, at least 2 hours a session, for 12 years. It took 1 year until I was competing (and mostly losing) on the National Tour. And then 5 years until I played my first event for Australia. At 10 years, I was still getting beaten by Olympians, but I definitely got in some wins and gave them a few scares on the court. That puts me in the top 0.1% of all players. 

A small piece of caution. Many people think they’ve hit diminishing returns when actually they are just at a plateau. Changing up your approach, taking a rest and going back to the activity, getting a new coach, training with people who are better than you - these can all help you continue to improve for a long time before you reach an inflection point where additional effort is no longer worth the returns. 

And if your goal is to be the best in the world, when your progress slows you at least know the competition thins out - most people will be doing the rational thing and stopping.

What’s your goal, and when should you stop?

Compounding returns

The flip side of the coin is compounding returns. If you don’t know how this works yet you’re not doing money right. We all should be earning interest on our interest. 

Multi-level marketing (rebranded ‘network marketing’ by all those people I’ve unfriended as they try to flog me weight loss shakes on Facebook) is another example. Every person you sign up below you has to sign up more people below them in order to make money. So one sign up = many future signups = compounding returns. 

Or, as one creative person tried to tell me: ‘it’s not a pyramid scheme, it’s more like a Christmas tree’.

Compounding returns - the rate of return increases the more resources you add.

What activities are you doing today with compounding returns?

1. Investing - put your money in a high interest account, or select ‘reinvest dividends’ on your shares and you’re compounding financially

2. Networking - each person you build a good relationship with knows many other people they can introduce you to. And then, as you meet some of those people not only does your network compound. But so too does your reputation - 2 people who both know you will speak highly about you when you’re not present. 

3. Fundraising - I often think that the overwhelming emotion that drives investors is FOMO, at least in venture capital. Missing out on investing in a winner is a far bigger loss than investing in a company that goes to a valuation of zero. So the first $1 is the hardest to raise, but for every investor that commits, the number of investors who want in on the deal compounds. 

4. Writing - I always thought writing was about your subscriber count. Turns out that writing compounds in unexpected ways. Developing a body of work through my blog means I’m better at podcast and panel interviews because I’ve thought deeply on many topics. I get more speaking gigs, because people read my content and want it delivered live. It’s led to job interviews, and it led my co-founder to approach me to work together. And of course, each subscriber that signs up often forwards my work to others. 

5. Leadership - hiring or managing people with specialised expertise compounds your output. Imagine you are building a house. You could learn to do each task yourself. But what if you had an architect, concreter, builder, bricklayer, tiler, plumber, electrician and so on. Your house would be built a lot faster (and have a much higher chance of staying standing). Leadership gives you leverage. 

6. Courage - each time you expand your comfort zone, it remains stretched. Each courageous choice we make means that next time we have a far greater range of choices available to us. Courage also compounds within communities as each brave act inspires others to emulate it. 

The #1 question to ask: Can I compound quicker?

Progress at the beginning of activities that compound is painstakingly slow. Many times, we want to give up because we aren’t getting anywhere.

But for compounding activities, every dollar, every hour, and every effort is worth many times more at the beginning of your journey than the end. 

So to compound quicker we need to jump start:

• How could you have 1:1 conversations with 100 new people this month?

• Could you quadruple your savings and investments this year?

• Could you write every day for six months?

• What would it take to hire someone now, rather than waiting until you had more money to do it?

• What is the scariest thing you can imagine? What if you did that today?

Two personal examples of jump starts:

Last year I set out to build an investor network in the USA. I could have done it slowly, one investor at a time via zoom. Instead I got on a plane. In the span of 5 months I spent time in 6 cities, attended 49 in-person events (and spoke at 3 of them!), had one-on-one meetings with Partners at 97 venture capital funds, and meetings with another 53 founders or well-connected people in the ecosystem. 

During covid, there was nothing to do but work. So I worked A LOT. At the time I was freelancing so every extra day of work was extra pay. And since lockdown laws made it illegal to leave your home, essentially every dollar went on my mortgage. Mortgages are compound interest working against you (and working for the bank!) So every dollar I paid off my debt in 2020 saved me years of paying interest on that dollar for many years to come. 

How can you compound quicker?

To stick or to quit?

Humans project our progress out linearly, assuming next week or next year will look similar to last week or last year. We’re wrong.

If your pursuit has diminishing returns, ask yourself ‘when should I stop?’

If your pursuit has compounding returns, ask yourself ‘can I compound quicker?’

‘A naive view of progress is to extrapolate in a straight-line. Yet our efforts tend to be dominated by two different trends: diminishing returns and compounding growth. Diminishing returns happen when efforts crowd each other out. The first hour of studying is your most energetic. The fifteenth is exhausting. As efforts become increasingly unproductive, a key realization is often to know how good is good enough. Compound growth occurs when each past improvement helps further growth. What initially looks like a trickle will end in a torrent. The problem is often one of patience. Since the beginning efforts seem unrewarded, they’re often abandoned before they can really start to work.’ ~ Scott Young 

Life isn’t a straight line. Which curve are you on?