{"id":19978,"date":"2023-09-24T23:56:00","date_gmt":"2023-09-24T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=19978"},"modified":"2025-02-25T08:50:28","modified_gmt":"2025-02-25T00:50:28","slug":"compound-interest-2","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/24\/compound-interest-2\/","title":{"rendered":"The power of compound interest"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/24\/compound-interest-2\/#Power_of_compound_interest_in_my_books\" >Power of compound interest in my books<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/24\/compound-interest-2\/#2019_Shareholder_Letter\" >2019 Shareholder Letter<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/24\/compound-interest-2\/#Mungers_view\" >Munger&#8217;s view<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/24\/compound-interest-2\/#Relative_articles\" >Relative articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Power_of_compound_interest_in_my_books\"><\/span>Power of compound interest in my books<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>I suggest that friends read my book &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010889106?sloc=main\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of Super Growth Stocks Investing<\/a>&#8220;:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Sections 1-3, pages 36-44, a description of the entire section and a description of the examples<\/li>\n<\/ul>\n\n\n\n<p>My book &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010935641?sloc=main\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of 10 Baggers<\/a>&#8220;:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Section 4-1, pages 188-192, on the relationship between frequent trading and compound interest.<\/li>\n\n\n\n<li>Sections 4-4, pages 214-218, on the relationship between portfolio rebalancing and compound interest.<\/li>\n\n\n\n<li>Section 6-1, 274 pages.<\/li>\n\n\n\n<li>Sections 6-7, pp. 317-336, on capital operations.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2019_Shareholder_Letter\"><\/span>2019 Shareholder Letter<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>At the beginning of the <a href=\"https:\/\/berkshirehathaway.com\/letters\/2019ltr.pdf\" target=\"_blank\" rel=\"noopener\">2019 shareholder letter<\/a>, Buffett spent a considerable amount of space (in italics below), talking about the most important element of investment success, &#8220;the power of compound interest.&#8221;<\/p>\n\n\n\n<p><em>In 1924, Edgar Lawrence Smith, an obscure economist and financial advisor, wrote Common Stocks as Long Term Investments, a slim book that changed the investment world. Indeed, writing the book changed Smith himself, forcing him to reassess his own investment beliefs.<\/em><\/p>\n\n\n\n<p><em>Going in, he planned to argue that stocks would perform better than bonds during inflationary periods and that bonds would deliver superior returns during deflationary times. That seemed sensible enough. But Smith was in for a shock.<\/em><\/p>\n\n\n\n<p><em>His book began, therefore, with a confession: \u201cThese studies are the record of a failure \u2013 the failure of facts to sustain a preconceived theory.\u201d Luckily for investors, that failure led Smith to think more deeply about how stocks should be evaluated.<\/em><\/p>\n\n\n\n<p><em>For the crux of Smith\u2019s insight, I will quote an early reviewer of his book, none other than John Maynard Keynes: \u201cI have kept until last what is perhaps Mr. Smith\u2019s most important, and is certainly his most novel, point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. <\/em><\/p>\n\n\n\n<p><em>In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes\u2019 italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.\u201d<\/em><\/p>\n\n\n\n<p><em>And with that sprinkling of holy water, Smith was no longer obscure.<\/em><\/p>\n\n\n\n<p><em>It\u2019s difficult to understand why retained earnings were unappreciated by investors before Smith\u2019s book was published. After all, it was no secret that mind-boggling wealth had earlier been amassed by such titans as Carnegie, Rockefeller and Ford, all of whom had retained a huge portion of their business earnings to fund growth and produce ever-greater profits. Throughout America, also, there had long been small-time capitalists who became rich following the same playbook.<\/em><\/p>\n\n\n\n<p><em>Nevertheless, when business ownership was sliced into small pieces \u2013 \u201cstocks\u201d \u2013 buyers in the pre-Smith years usually thought of their shares as a short-term gamble on market movements. Even at their best, stocks were considered speculations. Gentlemen preferred bonds.<\/em><\/p>\n\n\n\n<p><em>Though investors were slow to wise up, the math of retaining and reinvesting earnings is now well understood. Today, school children learn what Keynes termed \u201cnovel\u201d: combining savings with compound interest works wonders.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Mungers_view\"><\/span>Munger&#8217;s view<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>\u201cUnderstanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things,\u201d says Munger in typically grandiose terms. If you understand this truth, you will have a clear understanding of life and wealth, big and small.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"167\" height=\"143\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2023\/05\/ci-1600x1200-1.jpg\" alt=\"compound interest\" class=\"wp-image-19989\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Relative_articles\"><\/span>Relative articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/09\/26\/long-term-investment-2\/\" target=\"_blank\" rel=\"noreferrer noopener\">Andy Lin&#8217;s long-term investment experience sharing<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/02\/24\/andy-lin-investment-style\/\">The key points of Andy Lin investment style<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/11\/20\/the-compound-effect\/\" target=\"_blank\" rel=\"noreferrer noopener\">The Compound Effect<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/04\/22\/deferred-gratification\/\" target=\"_blank\" rel=\"noreferrer noopener\">People who are good at deferred&nbsp;gratification&nbsp;is more likely to succeed<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/01\/18\/exponential-growth\/\" target=\"_blank\" rel=\"noreferrer noopener\">Exponential growth can produce excess returns<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/24\/compound-interest-2\/\" target=\"_blank\" rel=\"noreferrer noopener\">The power of compound interest<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/05\/compound-interest\/\" target=\"_blank\" rel=\"noreferrer noopener\">Simple and compound interest calculator<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/21\/why-long-term-investment\/\">Why long-term investment is better?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/08\/30\/irr-calculator\/\" target=\"_blank\" rel=\"noreferrer noopener\">IRR Calculator<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/10\/16\/long-term-investors\/\" target=\"_blank\" rel=\"noreferrer noopener\">Stocks are the best bet for long-term investors<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/25\/stock-worth-holding-forever\/\" target=\"_blank\" rel=\"noreferrer noopener\">Investors should care annualized rate of return (IRR), How to calculate?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/05\/04\/young-people-investing\/\" target=\"_blank\" rel=\"noreferrer noopener\">The great enviable advantages of young people investing in stock<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/09\/18\/time-discipline-and-patience-are-the-three-elements-of-successful-investment\/\">Time, discipline and patience are the three elements of successful investment<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/16\/patience-to-invest-success\/\" target=\"_blank\" rel=\"noreferrer noopener\">Patience, an indispensable element of investment success<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/05\/01\/john-maynard-keynes\/\">John Maynard Keynes, Investment master<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/07\/27\/warren-buffetts-ground-rules\/\">The Chronicle of Buffett Partners &#8220;Warren Buffett&#8217;s Ground Rules&#8221;<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>In the 2019 shareholder letter, Buffett spent a considerable amount of time talking about the most important element of investment success &#8220;the power of compound interest&#8221;<\/p>\n","protected":false},"author":1,"featured_media":19989,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35,15,1151,375,11],"tags":[],"class_list":["post-19978","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-long-term-investing","category-charlie-munger","category-compound-interest","category-time","category-buffett"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/19978","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=19978"}],"version-history":[{"count":30,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/19978\/revisions"}],"predecessor-version":[{"id":34565,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/19978\/revisions\/34565"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/19989"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=19978"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=19978"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=19978"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}