Compounding
Money making money, interest on interest. The longer it runs, the faster it grows — the foundation of this whole book.
In One Sentence
Leave what you earn invested so it can earn more: your principal snowballs, and the further along you get, the faster it grows.
Why It Matters
I break compounding into four ingredients: principal, growth rate, time, and an investment that will still be around for the long haul. The one families most often underestimate is time. Many people want to wait until they've saved enough before they start, but time matters more than principal. Compounding doesn't rely on a burst of high returns, either. What it fears most is being interrupted: a big loss, a margin call that wipes you out, or selling halfway through.
One Number
Invest NT$2,000 a month from the day a child is born, assume a long-run return of 8%, and after 80 years you'd have about NT$146 million. That's a nominal amount, before inflation (author's estimate · Chapter IV).
In the Book
Chapter IV uses first principles to break compounding into its four ingredients, and tells the story of the wheat grains on a chessboard to show that time matters more than money. Chapter V ties every key term in my investing method back to one of those ingredients.
Go Further
- Long-term holding The longer you hold, the more time compounding has to work.
- Fees and costs Fees compound too — they just roll in the wrong direction for you.
- The timing trap Jumping in and out is the easiest way to interrupt compounding.
- Pay yourself first Pay yourself first, so compounding has principal to work with.
- Warren Buffett The vast majority of his fortune piled up after he turned 50.