The magical power of compound interest

Compound_Interest

In this short excerpt from the IBM Mathematics Peep Show documentary it reveals one of the most important concepts for anyone to understand in investing.

Often financial experts speak about compound interest in terms of waiting 30 or 40 years before the benefits really begin. This is a very long time to wait… The important thing is not only to wait for many decades to allow the money to compound; instead the important thing is to constantly add to and accumulate the money that is invested in a regular rate at regular intervals.

The example uses a grain of rice on a chessboard and the same principle applies with a regular monetary amount that is accumulated over time.

This concept may be unfamiliar if this is the first time a person is exposed to it, and the video may require repeated viewing until the message is finally understood.

This principle is how the investor Warren Buffett amassed a fortune of over $70 billion when he did not physically work in any of his companies. It is true that Warren’s wealth has increased to such a level because he has lived well into his eighties, and at the same time the most fundamental principle is to understand the fundamentals of investing. There are no short cuts in life to success. Everything has a price that needs to be paid in order to reap the benefits.

“Risk comes from not knowing what you’re doing.” – Warren Buffett

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things” – Charlie Munger

“Compounding is the magic of investing”
– Jim Rogers

The power of multiplication

Documentary: IBM Mathematics Peep Show

Directors: Charles Eames – Ray Eames

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