COMPOUNDING
"My life has been a product of compound interest." Warren Buffett
“The modern age opened; I think, with the accumulation of capital which began in the sixteenth century. I believe – for reasons with which I must not encumber the present argument – that this was initially due to the rise of prices, and the profits to which that led, which resulted from the treasure of gold and silver which Spain brought from the New World into the Old. From that time until to-day the power of accumulation by compound interest, which seems to have been sleeping for many generations, was re-born and renewed its strength. And the power of compound interest over two hundred years is such as to stagger the imagination. John Maynard Keynes, 1930
“The first rule of compounding: Never interrupt it unnecessarily.” Charlie Munger
“The elementary mathematics of compound interest is one of the most important models there is on earth.” Charlie Munger
“The ability to earn earnings upon earnings is essentially the definition of compounding.” Chuck Akre
“I wish I’d had an even greater appreciation of [compound annual growth] earlier in my life. Somebody like Warren Buffett, the real great investors, probably really get that very early in life and he’s somebody who just started young and that time is such an advantage.” Dennis Lynch
"The joys of compounding are there if you keep your stake growing, but all you need have is one year in which you give back half, and your program, at the same growth rate, must stretch out years and years longer." Adam Smith
“The following is an immutable, and what should be perceived as sobering, law of compounding. A single 100 percent loss can wipe out an entire lifetime of cumulative gains. Compounding is not an equal-opportunity mechanism. Its rewards and penalties are asymmetrical.” Frank Martin
“It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens. If over a meaningful period of time, Buffett Partnership can achieve an edge of even a modest number of percentage points over the major investment media, its function will be fulfilled.” Warren Buffett, Partnership Letter 1964
“Relatively small divergences in annual, compounded returns over many years result in dramatic differences in terminal wealth.” Nick Train
"Over time, a two-percentage-point advantage makes a huge difference to returns." Ralph Wanger
"Seemingly small annual return differences, compounded over long periods of time, will result in significant differences in the amount of money at the end of the period. There can be a very large payoff from selecting a manager and a strategy that provide value above the index return over the long run." William Browne
"Even apparently modest return differentials, operating over long periods of time, translate into staggering wealth differentials. During the seventy eight years of the Ibbotson series [1926-2003], one dollar invested in large company stocks expanded 2,285 times, while bonds produced a 61 multiple, and cash, an 18 multiple." David Swenson
“Every basis point of return - let alone 100 basis points - has a staggering difference in outcomes in the long run. That’s why you stay focused on the long run and the rate of return; that is where the difference is, that is what you want and need to capture.” Chuck Akre
“If you do the math, and think about it in any long term way, the people who do well, are the people who compound over and over again. Compound every year. Don’t try and get rich quick. Try to get a decent return and keep doing it.” Tom Steyer
“Compounding is the magic of investing.” Jim Rogers
"If you have a stock that’s gone up ten times, the next time it doubles it’s gone up twenty times and the next time it doubles after that it’s gone up forty times. Compound interest and return is staggering." Chuck Akre
"The effects of compounding even moderate returns over many years are compelling, if not downright mind boggling." Seth Klarman
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.” Charlie Munger
“Compounding is not intuitive, so it’s systematically overlooked and underappreciated… Physicist Albert Bartlett put it: ‘The greatest shortcoming of the human race is our inability to understand the exponential function’.” Morgan Housel
“The bottom line of all investing, whether it be Aunt Tillie's C.D. or Uncle Jack's venture fund, is compound rate of return.” Chuck Akre
“It’s all about business sustainability and compounding.” Rajiv Jain
“The ‘super high quality thinkers’ are our best guess of those firms whose shareholders could abdicate their right to trade stock (allocate capital themselves) sure in the knowledge that their capital will be well allocated for years to come within the business. This list is a group fo wonderful, honestly run compounding machines. We call this the ‘terminal portfolio’. This is where we want to go.” Nick Sleep
“Compound interest is a wonderful thing to have on your side and terrible thing to have working against you.” Shad Rowe
“Long-term compounding is an investor’s best friend, so why get in its way.” Guy Spier
"The nature of compound interest is it behaves like a snowball of sticky snow. And the trick is to have a very long hill, which means either starting very young or living very — to be very old." Warren Buffett
“Charlie always describes compound interest as being like, you know, being at the top of a very large hill with wet snow and starting with a snowball and getting it rolling downhill.” Warren Buffett
"Compound interest, described in a phrase of disputed origin, is ‘the eighth wonder of the world’. Wonder or trick, it has built great fortunes, and you can use it to get richer." Ed Thorp
“Compounding is the 8th wonder of the world and nothing is more exciting that to continue this beautiful journey of compounding.” Mohnish Pabrai
"The sooner you start, the more compounding can do for you. If, beginning at the age of twenty, you sock away just $100 a month in stocks, and your portfolio compounds at 10%, which is what stocks have provided historically, you will be a millionaire when you retire at sixty-five." Ralph Wanger
"A mere 3% annualised edge will produce a 2.4-fold advantage over a 30 year period - the salient lesson that compounding teaches - the power of a long runway." Allan Mecham
“Remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.” Walter Schloss
"Compounding is one of my favorite words. Compounding is powerful. Warren Buffett did not become one of the wealthiest men in the world by suddenly striking gold in a single highly successful investment, but rather by compounding the value of Berkshire Hathaway at a 20 percent or so rate for 45 years. If an investor can achieve an average annual return of 20 percent, then, after 45 years, an initial investment of $1 million will appreciate to $3.6 billion. Wow!" Ed Wachenheim
"All I know is that if you can end up with a 20% track record over a longer period of time, the compound rates of return are such that the amounts are staggering." Peter Cundill
“Einstein called compounding the eighth wonder of the world and our mission is to harness this dynamic for our investors benefit." Christopher Begg
“The thing about a compounding record - by it’s very nature, each link in the chain is equally important.” Charlie Munger
“The tyranny of negative compounding returns maybe the hardest lesson that far too many investors never master.” David Rolfe
"Over the years a lot of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is not an equation whose effects I would like to experience personally, and I would like even less to be responsible for imposing its penalties upon others." Warren Buffett
"In business and also investment, success is measured through the compounding of a series of returns. Mathematically, the biggest risk to a compounded series of returns is large negative numbers or even a single negative number, if large enough. Take however many spectacular annual outcomes and multiply them by just one zero and the answer is of course, zero." Marathon Asset Management
“And never forget that anything times zero is zero. No matter how many winners you’ve got, if you either leverage too much or do anything that gives you the chance of having a zero in there, it’ll all turn to pumpkins and mice.” Warren Buffett
"Underlying our investment values is the principle that the mathematics of compounding demands putting a high priority on avoiding substantial permanent losses. That’s why we’re committed to owning high-quality businesses in industries we understand and can underwrite. It’s also why we put the emphasis we do on risk management." Adam Weiss
“When it comes to compounding, I’m not sure everyone understands that percentage losses and gains are not equal. I’ve always managed to avoid the large losses. Imagine something as simple as that being one of your secret sauces.” Frank Martin
“The power of compounding is so great that our first job as investors is to avoid anything that might short circuit it.” Ira Rothberg
"Striving for sustained, uninterrupted compounding over long periods of time is smart investing, and that’s precisely our goal. Many people think of us as a ‘value investor’ and others ask whether we are a value or a growth investor. We’ve started to say, we’re neither, we are a compounding investor." Chuck Akre
"It's hard to believe that over the last 100 years the S&P 500 rose 273-fold, but adjusted for dividends it rose 18,520-fold." Morgan Housel
“Of critical importance, equity investors should make their primary goals (a) participating in the secular growth of economies and companies and (b) benefiting from the wonder of compounding. Think about the 10.5% yearly return of the S&P 500 Index (or its predecessors) since 1926 and the fact that this would have turned $1 into over $13,000 by now, even though the period witnessed 16 recessions, one Great Depression, several wars, one World War, a global pandemic, and many instances of geopolitical turmoil.” Howard Marks
"The great thing about compounding is that in order for it to be a thousand bagger it was only a five hundred bagger just halfway before there, and a 250 bagger and so on." Chuck Akre
“Good investing isn't necessarily about earning the highest returns. It's about earning pretty good returns that you can stick with for a long period of time. That's when compounding runs wild." Morgan Housel
"Investing is simply maximizing the rate of compounding for as long as capital can be employed net of fees and taxes. What strikes us as strange is how little we hear about compounding with regard to investing. We find the short-term perspective affecting the collective market psyche is focused on direction and immediate results that often limit the ability to truly accomplish outstanding rates of compounding." Christopher Begg
"Compounding matters and does so far more than people expect. The human brain thinks in a linear way which means that if we were asked to estimate what 10.22% compounded over 100 years would be then our answer is likely to be closer to 1,022% than 1,679,600%, something economists call exponential growth bias. This means that compounding is often underestimated and should be at the heart of long-term investing." Marathon Asset Management
"I usually ask my friends this question: Which would you rather have, $750,000 today or the outcome of doubling a penny a day for 30 days. What do I hear? Penny. So that's the question. Compounding our capital is what we're after, that's what makes it a great investment for us. What's the value of compounding? Well the answer in this case is simply astounding. Double a penny a day for 30 days gets you, who knows, $10 million, $737,000 change." Chuck Akre
"Compounding should be the overarching mission of investing activities for capital with a multi-year time horizon." Christopher Begg
“Financial markets suffer from a deep inability to price patience and compounding because of their dominant short-termism.” James Anderson
"Consider the Indians of Manhattan, who in 1626 sold all their real estate to a group of immigrants for $24 in trinkets and beads. For 362 years the Indians have been the subjects of cruel jokes because of it - but it turns out they may have made a better deal than the buyers who got the island. At 8 percent interest on $24 (note: let's suspend our disbelief and assume they converted the trinkets to cash) compounded over all those years, the Indians would have built up a net worth just short of $30 trillion, while the latest tax records from the Borough of Manhattan show the real estate to be worth only $28.1 billion. Give Manhattan the benefit of the doubt: that $28.1 billion is the assessed value, and for all anybody knows it may be worth twice that on the open market. Either way, the Indians could be ahead by $29 trillion and change.. What a difference a couple of percentage point can make, compounded over three centuries." Peter Lynch
"Over a sufficiently long time, compound growth at a small rate will vastly exceed any rate of arithmetic growth, no matter how large! For instance if, Sam Scared made 100% a year and put it in a sock and Charlie Compounder made only 1% a year but reinvested it, Charlie's wealth would eventually exceed Sam's by as much as you please. This is true even if Sam started with far more than Charlie, even $1 billion to Charlie's $1." Ed Thorp
“We think compounding is the most important framework in investing. Our business model, portfolio and structure is built around it.” Yen Liow
“Everything we do when investing people’s capital is based on compounding. The whole reason for being in the investment world is to compound money. We all know that 7% per annum doubles in about 10 years and 15% a year more than doubles in five years. I want that magic working for me all the time. The thing that screws up compounding is down years. In order to harness compounding, I wanted to make sure I didn’t have those down years in earnings.” Bill Stewart
“The determination to hold on [to growing and competitively advantaged businesses] is critically important, and not always well understood, aspect of our investment philosophy. At its core, it relates to the power of compounding. We believe these two ideas — (not) selling and compounding — are inextricably linked. Getting the first wrong makes the second impossible.” Chris Cerrone, Akre Capital
“Compounding is an astonishing concept which most people do not comprehend. For example, how much will a company’s earnings grow if it can compound them at 6-7% for 200 years? Most people will never have considered this question because it is simply something that has never happened before in human history. Before the modern era, there had never been a system in human history capable of continuous compounding. But this is exactly what emerged 300 years ago. Stock market returns don’t seem to offer much in the short term – and yes, much of their performance has come after America’s rise. But 200 years of continuous compounding has produced a return of more than a million times. Compounding truly is astonishing.” Li Lu
“For now I’ll simply repeat the ever wonderful 93 year old Charlie Munger ‘The first rule of compounding: Never interrupt it unnecessarily’. That takes resolve.” James Anderson
Further Reading:
‘Compounding Short Stories - A King, Columbus & Indians’, Investment Masters Class. 2016.
‘The Power of Compounding,’- Akre Capital Management.