Understanding The Magical Power Of Compounding

People often overlook simple and straightforward concepts, assuming they won't lead to significant wealth, and instead, they seek out more complex strategies, particularly in the financial markets. Compounding, although simple, is a potent concept frequently forgotten during investments. Rakesh Deshmukh takes a closer look at compounding and its significance in an investment journey

- RAkesh Deshmuk

Compounding is a term you have likely encountered not only in the financial market but also in schools or colleges. Perhaps you can recall learning how to calculate compound interest and distinguishing it from simple interest. In the context of the stock market, we often refer to compounding as a magic for investments through which investors can generate significant wealth over time by patiently holding on to their good investments. When we talk about the financial market, either regarding equity or mutual funds, and think about investing money, it’s hard not to admire Warren Buffett, an investor who is really good at it.

He has made a lot of money, running into billions, by investing smartly. He’s been doing this for a long, long time. Imagine, he started investing when he was just 10 years old! If he had waited until he was 30 to start investing, he would have had way less money, almost 100 times less than what he currently has. Now, let’s talk about another investor, Jim Simons. He is also a smart investor. In fact, he made even more money than Buffett each year for 20 years! But here’s the thing: Jim started investing when he was 50. So, even though he made a lot of money, he still has way less than Buffett.

This all goes to show the power compounding over a period when it comes to making money through investing. It’s like planting a seed early and watching it grow into a big tree over time. It was the renowned scientist and theoretical physicist Albert Einstein who said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” In his autobiography, Buffett simplifies the term, likening it to a snowball rolling down a lengthy slope, accumulating more snow and momentum with each rotation until it transforms into a colossal snowball.