The Linear vs The Exponential

The Linear vs The Exponential

When I was six years old, I read a book of cool math tricks. One of the experiment was called "How to become a millionaire." I was supposed to go to my mom and offer to do the dishes everyday for one whole month. As payment, I would only accept 1c for the first day. That sounds like a pretty good deal for my mom. The second day, I would receive 2c. Each subsequent day, the charge would double to 4c, 8c, 16c, etc. until the end of the month. Now a month is a mere 31 days at most. How much could I really make? I flipped the page to the mock invoice and my jaw dropped. I quickly ran downstairs to find my mom cooking in the kitchen and presented this proposal. My mom chuckled as my dad put down his newspaper and said "Sorry son, we don't have 21 million dollars."

Even though I was unable to trick my parents out of 21 million dollars, the idea of exponential growth stuck with me. Albert Einstein once said that "compound interest is the eight wonder of the world. He who understands it, earns it... he who doesn't, pays it." The problem is, most people do not understand it. In fact, if I walk down the street and ask random people if they would rather receive $1000 a day for a month or the payment structure of the dishwashing scheme, the vast majority would choose the $1000 a day. That choice will yield $31,000 over the month while the latter would place you among the wealthiest people in the world. Human beings are conditioned to think in the now. We ignore the growth structure and zone in on the $1000 vs the 1c. We focus on day one. Immediate reward are far more desirable than future rewards.

When the numbers are laid down on paper, it seems obviously logical to take the second pay structure. People will look at my math and quickly change their choice. However, when the choice of linear vs exponential presents itself in life masked in various scenarios, we continue to choose wrong.



Exponential Progress

So what is the point of this post? There are not many people handing out free money on the street or moms dishing out millions of dollars, so these are obviously not practical examples. It is because exponential progress lies in many aspects of life, mainly education. Almost everything worth doing in life follows an exponential curve. People want immediate satisfaction, even though foregoing that satisfaction will lead to a much greater reward in the future. Education is an example of path #2. The vast majority of people do not invest in themselves because they do not see immediate returns. Studying a book does not yield an immediate increase in brainpower. Running a mile does not show an immediate loss in weight. Lifting weight will not turn you into a bodybuilder by tomorrow. Trading stocks will not bring in profits right away.

In so many chances throughout life, we have chosen the option with immediate results. We have been conditioned to expect these results and we experience internal turmoil when these results are not realized. After multiple iterations, we grow increasingly frustrated which hinders progress. Eventually, we quit. Many people have false expectations in trading. When I first started trading live, I expected to make hundreds of thousands of dollars in the first year. I faced immense frustration. Instead of improving, I traded worse and worse everyday until I was in a deep hole. I consistently made negative progress until I was able to abandon these false expectations.

Learning to trade is an exponential activity. This is evident in the fact that experienced traders can makes millions a year. The trade off is that at the start, you will be making almost nothing. Expect to make nothing. Progress will be very slow. You will often go weeks and months while seemingly making no progress. Trust me, you are making progress.



Discipline

"Focus on the process, not the results." I cannot attribute this quote to anyone specific because I have been told this at one time or another by every successful trader I know. By "results", people are talking about the P&L. You should not focus on your P&L because when you are starting out trading, this is not the measurement of results. The true results are an unmeasurable internal understand of the process. For this reason, focus on the process. Are you following your rules? Are you trading correctly? Are you trading with discipline? P&L is a false indicator of progress. Even as you improve the process, you might not see any improvement in P&L. This does not mean that you are not improving as a trader. Discipline is understanding and following your process, even if results seem lacking.

So many times, I see people breaking their rules in hopes of catching a quick profit. These same people claim they want to become millionaires. When we break our rules, we are making negative progress. We are halting our exponential path to try and catch a quick $1000. Why grab $1000 now when it hinders your progress towards millions tomorrow?



Key Points

Everything in life with large rewards starts out slow, especially trading.

Discipline is following your system, even if you cannot see the positive results.

Focus on the process. Change the way you review your trades. Did you follow your system?

Green trades are not necessarily good trades and red trades are not necessarily bad trades.

It may seem like you are not making any progress but if you are working hard, you are.