Starting from a small base

Compounding is one of life's magical forces.  It's about the incredible power that comes from doing small things consistently, over a long period of time.  In a recent piece Morgan Housel wrote that compounding is not intuitive, so it's systematically overlooked and underappreciated.   I used this slide in a seminar that I gave to Government this week and it explains why it is so overlooked.  No one wants to go through the short-term boring.  We all just want to get to long-term exciting.  I always talk about the power of doing nothing when it comes to investing your money, and that's what compound investing requires.  It requires us to leave something small alone so that it has the chance to grow into something big.  Which explains why 'get quick rich' schemes are so enticing.  It enables you to feel like you are 'doing something' and there is always that (tiny) chance that you might be able to skip over the short-term boring.

Morgan Housel's piece explained compound interest so beautifully ("the things that can be built off a freakishly small base").  Warren Buffett has built a fortune from investing.  He has been so successful that thousands of books have been written about him.  Obviously, Buffett is a very good stock picker, but there are plenty of others who are as good as him.  But what the others didn't do was start when he started.  Buffett is where he is today because he has been investing for almost 80 years.

Morgan writes, "Buffett became serious about investing several years before puberty. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation."  He continues "without the capital base Buffett built before he could grow a beard, you’d probably never have heard of him."

"It is so easy to overlook how powerful it can be to take something small and hammer away at it, year after year, without stopping. Because it’s easy to overlook, we miss the key ingredients of what caused big things to get big. How can most of Buffett’s success be attributed to what he did as a teenager? It’s so crazy, so counterintuitive. And since it’s crazy and counterintuitive we overlook the right lessons. So we write 2,000 books on how Buffett sizes up management teams when the biggest and most practical takeaway from his success is, “Start investing when you’re in third grade.”"

Ok, so I know you're not in third grade, but if you haven't started yet, today is a great day.