Readings Digest 10.11.17: The Compounding Effect

Chart : 

 

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Source:  What I learned on Wall Street
Reflections: 

Today´s post is on the power of compounding and is inspired by articles I read this week. Isaac Einstein once called it the eighth wonder of the world. We look at compounding from two perspectives: Actions and investments. Answer this question first: “Take a piece of paper that is 0.1mm think and fold it in half and then in half again, and again up to fifty folds. How thick will it be after 50 folds? Take a random guess on what the results would be?

The correct answer is

around 112.6 million kilometres! That is almost 3/4 the distance from the Earth to the Sun! That´s the power of compounding.

Actions: Small actions done continuously can bear incredible results. When looked at individually, the actions may not amount to much but when holistically and over a period of time, they may accomplished a lot. Say you want to finish reading a book, if you look at the overall goal, it may look unattainable but what if you break it down into chapters and then assign at least a chapter a week. Within a short period of time, you would have finished reading the whole book.

Try increasing anything at the rate of 1% every day and by the end of a year you will have multiplied the beginning amount 37 times. That´s the power of exponential function. Bottom line: As you prepare next year´s resolutions, remember to commit to improving on reading, going to the gym, learning programming or anything else at the rate of 1% each day and see the results. If you want to read more on this incredible power of micro-actions compounded, check out this, this and this. So what is the one thing you want to keep doing every day?

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Enter a captionSource: Behavioural Gap

Investments: The power of compounding small steps is clearer when it comes to savings and investments. Say you begin saving $100 per month dollar and say you earn a 5% return on it annually. Those figures may sound like not much taken individually but when you combine them you get a return of $15,848 after 10 years. It shows you the power of small savings when compounded. Further to this, Nick Maggiulli helps us illustrate that “the right choices, when compounded, can help you succeed as an investor.

In conclusion, there is a power to taking small steps every day be it in investing or in actions as the power of compounding works in your favour. As Albert Einstein puts it he who understands the power of compounding earns it and he who does not, pays it. Have a compounded weekend, won’t you?

Quote:

“The greatest shortcoming of the human race is our inability to understand the exponential function.” Albert Allen Bartlett

Articles

Ben Carlson shows us why it is really difficult to time the market  when using historical valuations.

Stress might be the nudge you need to spark the creative process. “Nothing sparks resourcefulness like necessity and scarcity…we don’t talk enough about how most innovations trace their roots to stress and worry. “

As bitcoin keeps hitting new highs and given that it is all the rage these days (There have been more searches for “buy bitcoin” than for “buy gold”), it would be good to learn what some of the value investors are thinking of Bitcoin. “It must be noted that the entire cryptocurrency project might be a total failure; however, if it is not a failure, one can now see its return potential.

Morgan Housel: Never Do That Again
Being humble to know that your strategy may not work at times: “Unless it’s flagrantly obvious or reckless, “I have an evidence-based strategy but I am perpetually open to amending those views as our ever-evolving world adapts, and I know I’ll occasionally be wrong even when I technically should have been right” should be your position on almost every business, investing, and economic topic.”

 

Other interesting links:
  1. Carry a notebook always by Srinivas Rao
  2. Write to help you think by Howard Lindzon
  3. Nigerian writer Wole Soyinka on coup culture and challenging Castro by David Pilling

Author: Mokaya Erick

I am a learning investor who writes to make my thoughts clearer. I am interested in investment research and analysis, financial modelling and portfolio management.

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