THE 8th WONDER
Our world has been shaped by our ancestors and has made us what we are today. In the meantime, they gave us the seven wonders of the world which are like living legends of our distant past. But our modern world made one another wonder which was recognized by even Einstein, which is compound interest or more specifically compounding your money in the years that come by. The legendary investor of our generation, Warren Buffett has made all his money by simply using the power of compounding, he started very early on with his investment, as early as when he was just 11 years old, and kept investing in the stocks which he believed in. He started his own firm called Berkshire Hathaway which is kind of an investment firm that invests money in good companies.
All the 8 wonders of the world enlisted here:
1. The great pyramid of Giza – Egypt
2. The Great Wall of China – China
3. Taj Mahal – India
4. Petra – Jordan
5.Christ the Redeemer – Brazil
6. Machu Picchu – Peru
7. Colosseum – Rome
8. The Compounding Effect
How this 8th Wonder Ended up for Warren Buffet?
Legendary investor Warren Buffett has made nearly all of his wealth through the power of compounding. The compounding effect relies on two things, first the factor of time given for your investment to compound, and the second the rate of interest (CAGR) through which it multiplies. Money-making through compounding is a game, the more time you give for the money to compound the bigger the end result becomes. The principal amount does not really matter for the long run, it has a little effect on the final compounded amount.
It is one of the very simple things that we are taught in school but we fail to realize the potential of this effect until we see someone using it to make money out of nowhere.
Here are some astounding facts of Warren Buffett’s compounding journey:-
- He bought his first stock at just 11 years of age.
- He wasn’t even a billionaire till his 50th birthday.
- He made 99% of his wealth after his 54th birthday.
- He only got a Compound Annual Rate of Return (CAGR) of about 21%.
SIMPLE INTEREST vs COMPOUND INTEREST
These are the basic formulae that we are taught in school. It is one of the only things that school unknowingly teaches us about the money stuff. Every school by default follows the strict curriculum of not teaching the masses anything about money.
Simple interest and compound interest are the basics in the investing world, those who want to invest their money for the long run should know the clear difference between them, and how they work. Those who don’t know the difference invest their money in a savings account or fixed deposit that gives them simple interest as returns but those who know the power of compounding invest their money into the stock market or crypto market which multiplies your wealth and makes it bigger and bigger with time.
Pro tip: Always invest your money in compound interest and never in simple interest.
WHAT IS CAGR?
It stands for Compound Anual Growth Rate, which is a very basic formula to understand but unfortunately, financially illiterate people simply don’t understand this very well. It is the rate of return in percentage compounded periodically on an invested principal amount.
For example, if you invest $100 in the stock market and at the end of the first year you got a return of 15% which makes your money to be $115 and now this $115 becomes your principal amount and suppose you get another 15% returns on the end of the second year then your money becomes $132.25 whereas you would only get $130 from your bank‘s account using simple interest. This difference might not look like a very huge one but wait for the difference in the amount you see after 25 or 30 years, it becomes unimaginable.
The subtle difference between SI and CI is that the principal amount remains the same in SI whereas it changes in CI.
SI on $100 @15% for 30 years = $550 (450% gain)
CI on $100 @15% for 30 years = $6,621 (6,521% gain)
See the difference for yourself.
Warren Buffett the guru of compound interest only managed a CAGR of about 21%. The only way he made so much money because he started very young, which gave him a clear advantage over others as time is the most needed factor in compounding. Renaissance Technologies (created by Jim Simons) a world-renowned hedge fund has managed a CAGR of 66%, which is unimaginably huge but you may have noticed that they are not even close to Warren Buffett’s money, this is simply because of the less time frame they had for compounding their money at only 25 years as compared to Buffett’s 60 years.
On the other hand, Warren Buffett’s Berkshire Hathaway has an overall gain of over a million percentage from the day it started that clearly makes him one of the richest people the world has ever seen. Recently the price of one share of Berkshire Hathaway surpassed the allowed limit that the NASDAQ index could show. Amazing, isn’t it?
Calculate your CAGR here: https://www.thecalculatorsite.com/finance/calculators/cagr-calculator.php
WHY MOST PEOPLE AREN’T AWARE OF THE 8th WONDER?
Simply because the rich don’t want us to know what they know about money. That is the reason why we don’t have a subject of money management in our schools. The school basically runs on the foundations that were built by the rich in the early 1900s and the same curricular has been followed ever since.
Rich people have done a great job in keeping the secrets of money secret for many decades and they would keep it as it is unless common people become financially literate.
If the practice of compounding is done right then it can do wonders.
If you put one grain of rice in the first square of a chessboard and keep doubling it for the next one. At the 64th square, the number of rice grains would surpass the number of grains of sand particles present on all the beaches of earth combined.
This is the power of compounding.
