Dear valued client,
Markets have been directionless over the past couple of weeks as investors are crushed between the boulders of war and inflation on the one hand and the backdrop of a fairly robust economy on the other. Energy remains the only sector making any sort of headway so far this year (have you seen the price of gas lately?). Markets closed with losses for the week as inflation figures released today indicate slightly increased prices in the month of May.
In tech news, Apple is preparing for a world after smartphones. If you thought the largest company in the world was going to sit by and let Mark Zuckerberg dominate the virtual reality space, think again. Apple is expected to release a VR headset next year if its underlying software is appropriately up to date. Although they didn’t change their names for it, you can be sure Apple, Microsoft, and Google are going after the same metaverse prize as Meta.
I’d like to spend the rest of this week’s newsletter exploring a mathematical principle I believe to be the most imperative variable in improving people’s health, wealth, and prosperity.
“Play iterated games. All the returns in life, whether in wealth, relationships, or knowledge, come from compound interest.” – Naval Ravikant
Inspired by Darren Hardy’s The Compound Effect (a book I highly recommend), I’d like to discuss the power of compound interest with you. This concept is arguably the single most important mechanism for building wealth.
Albert Einstein called it the 8th wonder of the world. Compound interest is the interest calculated on your initial capital invested, plus all of the accumulated interest of previous periods of a deposit or loan. In other words, you invest some money. That money earns interest. Then that money + interest earns interest. Then that money + interest earns interest, etc, etc, etc. This process makes the growth of your wealth exponential, not linear, over the long term. But that’s the key point… for compounding to work its magic, it must be a long-term endeavor.
Walk with me through a thought experiment to explore the magnitude of this phenomenon…
You have two options.
Option one: you are handed a cheque for 3 million dollars.
Option two: you keep the dollar amount of a single penny that doubles in value every day for a month.
Which do you choose?
I suspect 99.9% of people would opt for option one. Who would turn down 3M cash? But let’s pause for a minute and calculate what fruit option two would bear if we were patient…
Value on day 1: $0.01
Value on day 5: $0.16
Value on day 10: $5.12
Value on day 15: $163.83 … we’re halfway through the month and it doesn’t look too encouraging…
Value on day 20: $5,243
Value on day 25: $167,772
Value on day 30: $5,368,709
Notice the vast majority of the growth occurred in the last 5 days of the month. That’s because the more money you have invested, the faster it grows. And here’s the kicker, if we were working with a month of 31 days, option two’s final yield would equal $10,737,418.
Which option would you choose now?
That’s the power of compound interest, and one must leverage it to build substantial wealth.
Take Warren Buffet for example; 99% of his net worth was earned after his 50th birthday. He’s now worth over 100B. Buffet often uses a snowball as a metaphor for compound interest; when you first start rolling it, there’s not much there. But once you get going and your snowball is on its 5th, 6th, 10th turn rolling down the hill, it’s getting exponentially bigger. The key is to keep it rolling.
Time is money’s best friend.
The compound effect works with money and investments, as I’ve illustrated above. It also works in every other aspect of life you care about: health, maintenance of relationships, success in your career. The compound effect is how habits are formed. Habits harden into character. Character shapes your life.
“Success isn’t about doing five thousand different things well. Success is doing the right things well five thousand times over.” – Tony Robbins
Have a terrific weekend,
PW
