032 - Compounding

Einstein famously described compounding as the 8th wonder of the world. It’s the secret superpower that drives network effects, population growth, and the spread of viruses—clearly it’s a force to be reckoned with.

In a recent conversation, Max De Melo and Patrick Niederdrenk of America One Luxury Real Estate illustrated another hidden example of compounding: reputation.

They mentioned that they could essentially predict inbound referral business despite having absolutely no idea where it would come from on a one-off basis. For any Ozark fans out there, it instantly reminded me of the scene where Marty Byrde talks about casinos. On any individual pull on the slot machine, he couldn’t predict the outcome. But on the aggregate, casino results become probability math—super predictable.

With a nod to “German Efficiency,” Max and Patrick mentioned that they basically don’t conduct outbound marketing. Their business is completely referral driven. And they’ve been growing. Fast.

This means that Max and Patrick have found viral growth, another way to describe compounding. One good experience leads the customer to recommend America One. Rinse, lather, repeat.

For a strange coincidence, I’ve also recently received a ton of inbound opportunities from people I’ve known for years and years. There’s a reason Warren Buffett and Charlie Munger put such a special emphasis on reputation—it’s a natural compounding engine.

And for a final callback to Charlie Munger’s beloved idea of inversion, I think it’s important to examine what happens when you give a customer or a boss—or anyone for that matter—a terrible experience. You create an agent for negative compounding. In the episode with Dylan Lipari, he mentioned a terrible experience with a store owner. Dylan’s a nice guy, and he didn’t talk about it explicitly in the episode, but I bet he’d love to tell you where *not* to get your shoes repaired in LA if you talked to him in confidence.

When you give someone a terrible experience, you create a motivated saboteur. Someone who will write bad reviews, give bad referrals, and basically become an unpaid intern for your competition. I like to call to mind the episode of How I Met Your Mother where Barney’s love life goes to shambles as a former romantic partner spread the news about his misdeeds.

The bottom line: reputation is everything. Do all in your power to guard, enhance, and leverage your own reputation. Don’t do anything that would endanger it—it’s your most powerful asset.

The questions of the week:

  • What scripted response would you like someone to give if they had to talk about you?

  • How can you turn those words from a hypothetical wish fantasy into a real-life review?

  • What can you do to enhance your reputation?

  • What low-cost actions could turn someone you know into an evangelist for you?

  • How can you share what you know or who you know with someone else?

So that does it for this episode. I hope it shows  some threads to pull.

If you’re interested in show notes or supporting the podcast, check out strategychainpodcast.com. If you want to get in touch with me, you can find me on social media @strategychain.

So until next time—thank you.

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Michael Roberson