Concept
Compounding
Compounding is growth on growth: returns that themselves earn returns, so that money left alone for decades grows slowly for a long time and then very fast. Housel's lesson is that it rewards time more than skill: of Warren Buffett's $84.5 billion, $81.5 billion arrived after his sixty-fifth birthday.
Buffett's returns were excellent, but Housel points out that others have earned higher ones; what is unmatched is that Buffett started as a child and never stopped. Investors who match his returns for a decade and then stop, or who start at forty, end with a small fraction, because compounding is not intuitive: the curve is flat for years and then it is not. This changes what skill means. The skill is not the return but the duration, and duration is a behavioural problem: not interrupting the process to buy a car, not selling in a fall, not starting late because the early amounts look pointless. The early amounts are the point; they have the most years ahead of them. The practical arithmetic is not about rates. It is how many years you have, which is more than you think if you start now, and how reliably the monthly order runs. A modest amount invested from twenty-five, never touched, beats a large amount invested from forty-five, and a cushion for error is what makes never touching it possible.
A real-life example
Two friends from a nursing school in Konya invest the same amount every month in the same fund. One starts at twenty-six, the other at thirty-eight, after finally feeling ready. At sixty the first has more than twice the second's balance. The difference comes from twelve extra years: a little from the extra deposits, most from the growth on them.
How to use it
- 1Start the monthly order this month, with an amount you will not miss; the years matter more than the amount.
- 2Never interrupt the process: no withdrawals for purchases, no selling in a fall.
- 3Count your years to sixty-five, not your expected return; the years are the lever.