Charlie Munger, the Vice Chairman of Berkshire Hathaway and the seemingly wiser counterpart of Warren Buffett says - Invert, Always Invert. The example that he famously uses to explain it to us mere mortals is that if he were to find out about the place where he is destined to die, then he would never go there. The greatest facts of life are hidden under the hood of simplicity. The Art of Simplification is arguably, the most sought after skill in the world.
What do you think is the impact of spending what you earn - all of it? That is the Power of Compounding Not Working for Us. Now, let's take it a step further. What do you think is the impact of fulfilling your unfulfilled desires by loading up on credit card debt and by stashing away whatever little savings you have in the savings bank account or even a long term bank deposit for that matter, where rising inflation is eating into your capital like a termite? That my friend, is The Power of Compounding Working Against Us and it will eventually ruin us by every yardstick that we can possibly fathom. Time to Invert. Would I still invest in an asset class if I knew that I am earning earning negative real returns adjusted for inflation & taxes?
What do you think helps us compound our wealth faster than others? It's Risk right? Not quite, it's calculated risk where we strive to protect the downside while setting marginal expectations for the upside. Any ephemeral upward spike in the upside is a bonus which in turn adds more fuel to the Compounding Engine working in our favour. It's The Heads I Win and Tails I don't lose much analogy, shamelessly liberated from Mohnish Pabrai's book - The Dhandho Investor. Great book and here's the audible link in case you are an avid listener of books - https://www.audible.in/pd/The-Dhandho-Investor-Audiobook/B07VDTXJPV (No, it's not a sponsored link and I would not get paid if you choose to subscribe to it)
How do you think it applies to our professional outlook? We are genetically programmed to follow the herd because of the age old dogma that stipulates - The head that sticks out of the herd ought to get beheaded the fastest. Having said that, it's impossible to realize our true worth & our true north without being willing to put our personal brand on the table. However, it's equally important to be cognizant of the fact that when we put out our personal brand with almost everything we touch professionally, we become solely accountable for the upsides as well as the downsides. Is it worth the risk though? The answer is a resounding 'YES'.
I was speaking with the global CTO of one of our existing customers sometime back - He said, it is imperative to focus on improving your LTV/CAC (Life Time Value of your Customer/Customer Acquisition Cost) ratio because that allows you to save substantially both on time and money that your team would otherwise waste away on unnecessary operational activities.
He further added, would my customer be willing to pay me any extra because my team chose to spend 47% extra time & resources on maintaining the challenges of a self managed database & cloud environment on AWS, Google Cloud or Azure in a micro-service based approach? Or would they be a tad more willing to pay extra because they can get more bang for the buck that they're spending with my company? The answer is as clear as day, is it not? Time is money - those who understand the value of it, enjoy the benefits of compounding and those who don't, suffer from negative compounding.
He also said that, if a tool geared up to solve automation can do the job faster than 50 or more of my full time employees at a fraction of the cost, then the price that I pay for the tool cannot be expensive when I pit it against the Opex and the Capex (both tangible and intangible) of 50 full time employees which can then be free'd up to invest in areas that would impact my business's top line & the consequential bottomline. If a tool allows me to control my cloud operational cost by allowing me to shift from one cloud provider to another with a few clicks and allows me to handle challenges around data governance and privacy by resorting to a multi-cloud strategy across regional data centres of various cloud providers seamlessly, then it's a gold mine in an era where data is the new oil.
One additional tip off that I received from him - when you calculate, LTV, I'd rather have you calculate LifeTime Gross Profit i.e. LTGP, and work out your LTGP/CAC ratio instead. It ought to be at least 3:1.
The low risk path to stupendous wealth in both, the personal as well as the professional context is the path less traveled - it is the path that goes against the conventional herd wisdom backed by our most powerful conviction and the least potential downside.