I’ve been thinking a lot about compounding lately, partly after re-reading "The Psychology of Money" and partly from my own experience working as a software engineer and running a IT consultancy and knowing many people working in Big Tech. Also compounding in terms of investing is a topic that comes up a lot in my feed and I recently wrote an article about it on Substack which made me thinking even more about this.
IMO, from the outside, tech looks like the perfect compounding machine, would you agree? From the inside, it often feels different. Every few years, the underlying technology shifts in a way that quietly reduces how much past effort still matters. Companies don’t necessarily fail, but progress slow down and are forced to reinvent themselves. See Microsoft, Amazon, Meta which all had to reinvent themselves quite regularly because of Mobile, Cloud/SaaS and now AI.
I’ve also seen this firsthand. My business didn’t blow up, but each major shift forced us to rethink what we offered and where our value actually came from. The sense of steady compounding disappeared for a while.
AI is what made me think about this again. A lot of AI-driven companies are growing fast, but many depend on technology and pricing they don’t control. As an investor, that makes me question how durable those businesses really are.
Do you assume tech companies compound by default, or do you actively price in the risk of resets?