Compounding Effect

The Power and Protection of High Compounding Sales/Earnings growth:

Thanks to the power of compounding, investing in growth stocks can in effect compress time. In other words, instead of taking a decade or more to double your money in a normal blue-chip stock, you can double your money much quicker in a true growth stock.

What actually happens as a result of faster sales/earnings growth is that shortens the time it takes to double sales/earnings. People that do not understand the powerful force of compounding will often mistakenly assume that a 20% growth rate will produce twice as much as a 10% growth rate. However, compounding is more about geometry than it is simple mathematics. Note that $1.00 invested today that grows by 10% per annum does not double until 8th year [Gain: 100%, $1>$2]. In contrast, $1.00 invested at 20% doubles in the 4th year, and then again in the 8th year [Gain: 400%, $1>$2>$4]. The net effect is that by doubling my average rate of return from 10% to 20% per annum, I do not earn two times the money – instead I get double the doubles. Increase the growth rate to 30% and that first dollar will double 3 times during that period [Gain: 800%, $1>$2>$4>$8].

Doubling the number of doubles over the same time frame shows the incredible power of compounding the true growth stocks are capable of offering – it compresses the time!

Albert Einstein – “Compound Interest is the eighth wonder of the world.”

Warren Buffett prescribes his amazing success to three items: [a]. He was born in America, [b] He lived to a ripe age of over 80, and [c] He understood the magic of compounding. 


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