I am often surprised by how little people recognise the power of compounding. I think this is in part because the initial effects are so small, yet, (there is a clue in the name). the compound effect can be so substantive.
We are all aware of the superinvestor Warren Buffet. Yet what many do not know is that he has made more money in the last 10 years than the previous 50. This is despite the fact that in that 10 year period he has made the ill fated investment into Tesco's and has held significant positions in Amex, Coke and IBM. Great positions that made him lots of money in the past (Amex, Coke). But not great positions over the last few years.
Yes he has had big successes - lending to Goldman Sachs in the financial crisis amongst others, but what has really made him money is the the great wall of wealth he has made in the last 50 years is now compounding away and producing an avalanche of cash each year.
I currently hold some Burford Capital 6.125% bonds so for the ease of maths let us say that an investment can compound at 6%. (I know there is tax and transaction costs but I am trying to keep this easy).
Say I have £10,000 in the bonds in year 1 I get £600.
In year 2 my £10,600 earns £636
In year 3 my £11,236 earns £674.16
etc, etc
In year 10 my £16,894.78 earns £1,013.68
In year 20 my £30,255.99 earns £1,815.35
In year 50 my £173,775.04 earns £10,426.50 finally making £10,000 pa from my initial £10,000.
Now I accept that 50 years is a very long time for an investor and as per Keynes "in the long run we are all dead. But it goes to suggest that a small action taken now could have a substantive effect in the future when carried on and compounded.
I read particularly on Twitter about people claiming 30-60% gains each year and that is fantastic work if you can do it. But for those of us that cannot produce these results it is in my opinion well worth considering utilising compounding to our advantage.
What should also be noted is that if you take the rate of return to 10% available on a RDSB dividend in the last 24 months
In year 26 my £108.347.05 earns £10,834.70
In year 50 my £1.067,189.57 earns £106,718.95
Now 26 years is still a long time, but hopefully these examples begin to show that a small action today, both in getting the revenue stream started now, not next year, and in thinking about that revenue stream value, (adding that extra 1%) make substantive differences when compounded. And best of all the power of compounding is open to anyone who wants to take advantage of it.