A common Fallacy related to #CompoundingEffect
You will hear even the best proponents long term investing and compounding say that, "the problem with compounding is that most of the gains are back ended.”
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You will hear even the best proponents long term investing and compounding say that, "the problem with compounding is that most of the gains are back ended.”
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Often the example of Warren Buffet is quoted saying that most of wealth got generated after he crossed 70 years (even though he started at the tender age of 11!).
This statement is specious.
It gives you an impression that it is a slow way of gaining & it needs patience...
This statement is specious.
It gives you an impression that it is a slow way of gaining & it needs patience...
...and possibly there is a faster way of gaining other than compounding. Let me clarify here...with the exception of sub-atomic world, a lottery, or adoption by a wealthy person or any such plain luck, there is no quantum leap in real life.
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(3/13)
All gains happen one step at a time. You don’t become strong & powerful overnight. Your business doesn’t grow multi-fold overnight. Earth took billions of years to form. Amazon was not the largest company the day it was formed.
The statement is correct in the absolute value sense. In absolute terms Warren Buffet has made far more money after 70s than when he made in 20s. When we look at a typical exponential graph of compounding, it appears that most of the gains have come recently.
But, here is the myth buster…
Assume that someone started investing with $100. She compounded the money by 20% for 80 years (on similar lines with Warren Buffett).
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Assume that someone started investing with $100. She compounded the money by 20% for 80 years (on similar lines with Warren Buffett).
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Her money grew into some astronomical figure in 80 years. Look at the chart representing the growth of the wealth. It appears that the wealth started growing only after 50 years, especially after 70 years. Up til 50 years, the growth looks conspicuous by its absence. 
Now, let’s break up the chart, and look at the first 50 years.
What do we see here! The first 50 years also saw equally phenomenal growth. But again, it appears that most of the growth came after the age of 20, especially after 40!
What do we see here! The first 50 years also saw equally phenomenal growth. But again, it appears that most of the growth came after the age of 20, especially after 40!
You know the drill by now. Let’s break it up again and see how the first 20 year look. You can guess what’s coming!
Yes, as you probably guessed, the growth is equally good in the first 20 years as well.
Yes, as you probably guessed, the growth is equally good in the first 20 years as well.
This property of Scale Free Distributions is called “Self Similarity”. The distribution looks similar at all scales (Similar to the Fractal Nature of Stock Price Charts!)
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For an investor who started with a capital of 100, reaching 3195 in 20 years is equally good as reaching 758370 in 50 years and a humongous 180019039 in 80 years! Mind you, at the age of 20, the investor has not even imagined something like “180019039”.
So her anchor is not this humongous figure, it is the $100, she started with, isn’t it!
This settles the argument that Compounding is slow and back ended. This also settles the quest for finding an alternative faster quantum leap.
This settles the argument that Compounding is slow and back ended. This also settles the quest for finding an alternative faster quantum leap.
I reiterate...there is no quantum leap in domains of fitness, success, skill development, investing etc. #Compounding is not back-ended. It is the fastest & the only way to grow. Irrespective, of what your starting base (P) is, all you need is a positive r and enough iterations!
