In my last blog we focused on the story of the Manhattan Indians – an event that highlights the lessons Tribal people have learned over the course of history concerning our traditional homelands. This particular event also gives us the opportunity to learn another lesson that may hold the key to our long-term success. In this scenario, we know that the event happened 392 years ago. We also know that the sum of the sale was approximately $24. Using the work of Professor of Finance Jeremy Siegel from the Wharton School of the University of Pennsylvania, we can also see that the real returns of the overall stock market over the last 200+ years have been approximately 7%. With these three factors we can calculate the value of that seemingly insignificant sum of $24 that today would have grown to approximately $7.9 trillion – or $7,918,667,257,947.98 to be exact.
What you are seeing here is money’s ability to grow over time through the Law of Compound Interest – what Albert Einstein called “the eighth wonder of the world.” Compound interest arises when interest earned on an investment is added to the principal and then interest is earned on both the principle and the accumulated interest. For example, a bank may give 5% interest on a certificate of deposit (or CD) which is an example of simple interest. The investor of the CD will earn $5 a year on a $100 investment over the life of the CD. But with compound interest, the investor would be able to add the $5 earned in the first year to the principal, and then in the second year earn 5% on $105 for a return of $5.25 in the second year. In this example the extra $.25 doesn’t seem like much but over time, small sums grow into large sums like we saw in the Manhattan Indian example.
Compound Interest is the fundamental bedrock of Warren Buffett’s investment philosophy. Buffett, who many consider to be the greatest investor of all time, started out in the late 1950s with $10,000 and has grown his net worth to $63.4 billion. An early Buffett investor Dr. Carol Angle noted that he would have them “calculate how money would grow, using a slide rule.” In a 1998 Forbes article Angle said, “He brainwashed us to truly believe in our hearts of hearts in the miracle of compound interest.” Charlie Munger, Buffett’s business partner of over 40 years, was also quoted in a 1996 Forbes article stating, “The most powerful force in the universe is compound interest.”
Fundamentally, Compound Interest is the first and most important principle to investing and creating long-term wealth. Understanding Compound Interest and how to earn it is, as Charlie Munger says, “the heart and soul of understanding a lot of things.”
What you are seeing here is money’s ability to grow over time through the Law of Compound Interest – what Albert Einstein called “the eighth wonder of the world.” Compound interest arises when interest earned on an investment is added to the principal and then interest is earned on both the principle and the accumulated interest. For example, a bank may give 5% interest on a certificate of deposit (or CD) which is an example of simple interest. The investor of the CD will earn $5 a year on a $100 investment over the life of the CD. But with compound interest, the investor would be able to add the $5 earned in the first year to the principal, and then in the second year earn 5% on $105 for a return of $5.25 in the second year. In this example the extra $.25 doesn’t seem like much but over time, small sums grow into large sums like we saw in the Manhattan Indian example.
Compound Interest is the fundamental bedrock of Warren Buffett’s investment philosophy. Buffett, who many consider to be the greatest investor of all time, started out in the late 1950s with $10,000 and has grown his net worth to $63.4 billion. An early Buffett investor Dr. Carol Angle noted that he would have them “calculate how money would grow, using a slide rule.” In a 1998 Forbes article Angle said, “He brainwashed us to truly believe in our hearts of hearts in the miracle of compound interest.” Charlie Munger, Buffett’s business partner of over 40 years, was also quoted in a 1996 Forbes article stating, “The most powerful force in the universe is compound interest.”
Fundamentally, Compound Interest is the first and most important principle to investing and creating long-term wealth. Understanding Compound Interest and how to earn it is, as Charlie Munger says, “the heart and soul of understanding a lot of things.”
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