Podcast #41 - The Power of Compounding

It’s an unwritten rule that at some point every finance podcast needs to release an episode on the power of compound interest. Well this week, it’s Telescope Investing’s turn!

"Money makes money. And the money that money makes, makes money"

- Benjamin Franklin

Successful investing really just boils down to just two things - picking good quality companies and holding them for a long-time. Time is the operative word in that statement, it takes decades for the exponential growth of compound interest to show its true power.

It’s a rare investor that has a lifetime in the market, but over the very, very long run, compound interest can deliver staggering returns. Warren Buffett is the greatest living example of this. Over 99% of Warren’s net worth of ~$110B was accumulated after the age of 52, and one of the reasons he’s among the most successful investors of all time is that he started so early (buying his first stock when he was 11 years old) and has been investing for almost 80 years
Berkshire Hathaway shares have grown on average 20% per year compounded since 1965. That doesn’t sound particularly exciting until you realise this means doubling your money every three and a half years. If you can do that for 80 years, you’ll end up with nearly eight million times the amount of money you started with
Developing a savings habit and investing is one of the best things you can do for your future self, and one of the most common things we hear is that people wish they had started earlier. We both started investing in our twenties, but we wish that had been in our teens when we had summer jobs! You can jump-start this by investing for your children (or nieces and nephews). A small amount of money invested each year, compounded over 20 years, can give them a sizable base from which to build
It’s said that “the first million is the hardest”, but even harder is the first $100K, and harder still is the first $10K. Investing at the beginning is hard because living expenses make up a large part of your income, and there may be little if anything left over to invest. As your investments grow, your passive income increases, and your living expenses as a percentage of your income drops. The goal of financial independence is for your passive income to cover your living expenses, at which point you’ve basically achieved financial freedom. You can do this by either increasing your passive income or reducing your living expenses, or ideally both!
Fees and taxes on your investments can have a material impact on your returns, and this is magnified in the long run as those fees also compound! Passive index funds typically charge less than a 0.25% fee (some Vanguard funds are as low as 0.03%), compared to actively managed funds which are generally over 1% and can be as much as 2% annually plus a 20% charge on any profits made. This really adds up in the long-term, and it’s especially galling when you realise that most active fund managers actually underperform the market!
We’re nearly twenty years into our own investing careers. If you haven’t begun your own journey yet, the most important takeaway from today’s pod is to just get started. The best time to start investing might have been twenty years ago, but the second-best time is today!

The following companies are mentioned in this episode: BRKB, AAPL

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