Monthly Archives: February 2020

Power of Compounding is eighth wonder

Power of Compounding is eighth wonder. How?

Anyone can solve the equation 6+6+6+6. But ask somebody to calculate 6x6x6x6 without a machine and they will be confused. The human brain is designed for linear processing, not exponential.

Some examples are completely beyond comprehension: “A piece of paper is folded in two, then in half again, and again and again. How thick will it be after fifty folds? What would be a ridiculous number? Well, let’s assume that thickness a sheet is apprx .004 inches, then its thickness after fifty folds is a little over sixty million miles. This equals the distance between the earth and the sun” Linear growth we understand intuitively.

However, we have no sense of exponential growth.” Try this at home. You cannot fold a paper more than 6 times with hands.

The most powerful force in the universe, as Einstein referred to it, which many of us avoid for two main reasons.

  1. One, most people just don’t understand how it works. For instance, 10% growth for 15 years is not 150%, it’s 417%!
  2. The second reason why many fail to take advantage of compounding is because it takes time.

Warren Buffett was not rich forever, 95% of his net worth was earned after his 60th birthday. Till than he just waited to compounding to work in his favor.

Strongly avoid event-based investment calls such as budgets, monetary policies, elections, etc. Real assets created by bypassing this noise and long-term investments.