Compound interest the eighth wonder of the world
Albert Einstein once famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Einstein suggested that compound interest can work for you or against you. The choice is yours. If you use it to your advantage with your investments, it will make all the difference over the long term. Long term meaning 10 years or more.
Whether Einstein actually said it or not is open to debate but it is entirely plausible that he did in fact say it.
Interestingly there is a wonderful rule of thumb method for calculating compound interest called the Rule of 72. Basically you divide the interest rate or investment return into the number 72. The result is the number of years it will take you to double your money. Let me illustrate this with an example.
You invest £10,000 and you achieve an investment return of respectively 7.2%, 14.4% and 21.6% per annum. It will take the following number of years to double your money.
10 years at 7.2% p.a. (72/7.2)
5 years at 14.4% p.a. (72/14.4)
3 years and 4 months at 21.6% (72/21.6)
Is this achievable in practice? Well it all depends of course.
An investment return on shares of 7.2% a year net of charges and taxation is historically achievable. In order to achieve a return of 14.4% a year on shares you would need to take a higher level of investment risk and need investment skill. A return of 21.6% a year is only likely to be attained if you are a highly skilled investor like Warren Buffet. In other words you would need the time, inclination and skill to achieve such high returns.
In my experience value investors such as Buffet and other so called guru investors are able to produce very high returns because they adopt a very patient approach. They carefully research the stock market to find those companies that are undervalued, unloved and under researched. They also seek companies that have a sustainable competitive advantage which gives them a competitive edge over other companies. Their approach is a very patient one which means that over periods of up to 3 years their portfolios may lag the market but once the market wakes up and sees how much these shares are undervalued their prices tend to then rise sharply.
The great news is that my fund management company Minerva Money Management has a value investing fund called the CCM Intelligent Wealth Fund. So what are you waiting for? Contact us today to find out how to invest in our fund. You know it makes sense.