|
|
|
The New Slant Really understanding compounding will make all the difference in investing. I believe that Warren Buffett, the worlds greatest investor, is hardwired to think geometrically. He is rich beyond dreams because he totally gets the magic of compounding, and he executes on the concept. I am going to get these numbers wrong because Im doing them from memory but it doesnt matter. Youll get the concept. Buffett started a partnership way back when. He had a number of limited partners invest with him, and he took 20% of the gains. In the late 1960s he terminated the partnership with his famous letter, When you no longer understand the way the game is played, its time to leave the game. Im paraphrasing, even though its in quotes. Buffet took about $100 million out of that first partnership for himself, so he was working with $100 million, keep that in mind. In 1974 when the bear market bottomed, it might have been early 1975, he started another rise...he took over Berkshire Hathaway. Buffet, since the 1970s, has been getting a compounded (remember that means exponential) growth rate of about 22 to 24%. This is where I introduce you to the cousin of the Magic of Compounding, which is called the Rule of 72. With the Rule of 72 you can calculate how long it will take you to double your money at any given rate of return. OK? Lets take an example. If youre earning 12% on your money and you want to know how long it will take to double it (were compounding, remember?) divide 72 by 12, and your answer is 6. It will take 6 years to double your money. Lets do another one. If youre getting 6% on your money, divide 72 by 6 and youll see that it will take 12 years to double. If youre getting 9%, its 72 divided by 9, or 8 years to double up. As for Warren Buffett, hes getting 22% on his money. This means you divide 72 by 22 and gee, in only 3.27 years, or every 3 years and 4 months, he doubles his money. Since hes been at it about 35 years with that $100 million he had to play with, hes doubled his original $100 million almost nine times. You get that by taking 35 years and dividing by a double every 3 years and 4 months. It equals 10.70, or lets go with nine doubles to adjust for a rate of compounding that is varying. The key point is hes not making 9 times his money with the $100 million, that would be an arithmetic progression that would give him $900 million. Hes making nine doubles, a geometric or compounded progression. Lets see how that works. Warren Buffets Geometric Progression Starting Dollar Amount: $100 million Time Periods Involved: Nine 3 year and 4 month periods Period Time Taken Compounded Gain 0 Starting Point $100,000,000 1 3 years, 4 months later $200,000,000 2 6 years, 8 months later $400,000,000 3 10 years later $800,000,000 4 13 years, 4 months later $1,600,000,000 5 16 years, 8 months later $3,200,000,000 6 20 years later $6,400,000,000 7 23 years, 4 months later $12,800,000,000 8 26 years, 8 months later $25,600,000,000 9 30 years later $51,200,000,000 I believe Buffet is worth about $47 billion. It doesnt matter, he is somewhere in his ninth double. This is the magic of compounding! Also, he never sells. This means his money is doubling every three years and four months with no tax consequences. He gets taxed only when he sells. Under normal conditions, the money compounds until he dies, then its taxed at a capital gains rate in the far distant future. In Buffetts case, hes giving most of his wealth to the Gates foundation to benefit society. Teach your children to live a balanced life, and also help them master this concept and you will have very happy and very rich children. In stocks I show you how to make money at the bottom by buying depressed securities that are going to come right back, making you a fortune as they rocket off the bottom. In the future I will also show you how to make money with the Warren Buffet concept, or classical Graham and Dodd analysis. In the mean time, good luck with understanding the magic of compounding. Start thinking exponentially, Make Money Now |
加入最爱