Transcripts
The Timeless Investment Strategy:
Speaker:Everything You Need To Start Making Money In The Stock Market Today (Investpreneurs Book 1)
Speaker:Written by
Speaker:Bill Grand
Speaker:Narrated by Russell Newton.
Speaker:The ultimate goal of investing your money is to earn back more than your initial investment.
Speaker:This is what makes it different from simply saving your money.
Speaker:Invested money doesn’t just wait for you - it grows.
Speaker:The longer it sits in savings,
Speaker:the bigger it grows,
Speaker:which is why time is the key ingredient to a profitable investment strategy.
Speaker:But why does invested money grow?
Speaker:How can it be that money simply sitting in an account can earn you profit?
Speaker:The secret is called compound interest (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:The number one reason that investors fail to make big returns on their investment is because they don’t fully understand this simple concept.
Speaker:Compound interest is the reason that the amount you invest doesn’t matter.
Speaker:Too many people make the mistake of thinking that investing is something that you do after you already have a sizable savings.
Speaker:But the ultimate goal of investing is to grow your savings.
Speaker:Even the smallest investment can swell into hundreds of thousands of dollars given enough time.
Speaker:A small investment that spends years accruing interest will always result in a higher profit than a large investment that doesn’t have as much time to grow.
Speaker:It’s accrued interest that makes investments profitable,
Speaker:not the investment itself (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:Think of your investment like a snowball rolling down a hill.
Speaker:The size of the snowball when it reaches the bottom has nothing to do with how big a ball you started with - it’s about how high the hill is.
Speaker:Sure,
Speaker:if you build a big snowball and roll it down the hill,
Speaker:it will be bigger at the bottom.
Speaker:But your hill is short,
Speaker:it’s not going to grow very much.
Speaker:On the flip side,
Speaker:a tiny snowball rolling down a very big hill is going to pick up a great deal of snow.
Speaker:At the base of the big hill,
Speaker:you’ll end up with quite a big snowball indeed.
Speaker:In this example,
Speaker:the snowball is your investment,
Speaker:the hill is the amount of time you have,
Speaker:and the snow is the compound interest.
Speaker:Perhaps another way to think about it is planting a tree.
Speaker:The size of the seed has nothing to do with how big or fast your tree grows.
Speaker:Even the tiniest seed can grow into a massive tree if it gets the right amount of sun,
Speaker:water,
Speaker:and is planted in healthy soil.
Speaker:To tap into the power of compound interest,
Speaker:you have to stop thinking about your investments in terms of money,
Speaker:and start thinking about them in terms of time.
Speaker:No matter how old you are,
Speaker:the best time to start investing was 10 years ago.
Speaker:The second best time to start investing is right now.
Speaker:So what exactly is compound interest?
Speaker:Albert Einstein called it the most important invention in all of human history,
Speaker:but that hardly helps us to understand how it works in real,
Speaker:financial terms.
Speaker:If you don’t understand compound interest now,
Speaker:don’t worry.
Speaker:Many people have never even heard of it,
Speaker:and that’s why so few people take advantage of it (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:But you are no longer going to be one of those people.
Speaker:We’ll begin with the dictionary definition of compound interest,
Speaker:which reads “a method used to calculate interest paid on both the principal and on accrued interest."
Speaker:To put this more simply,
Speaker:compound interest is interest paid on interest.
Speaker:Rather than taking the initial interest on your investment as a payout,
Speaker:you reinvest it.
Speaker:When the next period comes around,
Speaker:the interest that you’ve earned is not only on the principal sum,
Speaker:but on any interest that was previously accrued on that sum.
Speaker:The actual amount of money you’ll earn in compound interest will depend on how much money you’ve invested,
Speaker:the percentage of interest paid on that amount,
Speaker:and the number of times per year that interest is paid out.
Speaker:Depending on the account,
Speaker:interest could be paid out yearly,
Speaker:half-yearly,
Speaker:quarterly,
Speaker:monthly,
Speaker:weekly,
Speaker:daily,
Speaker:or even continuously.
Speaker:The rate at which interest is paid on your account is called the “compounding frequency."
Speaker:The more frequently interest is compounded on your investment,
Speaker:the more money you will make (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:To demonstrate how this works,
Speaker:imagine that you open an investment account and invest $100.
Speaker:If the annual compound interest rate is 3%,
Speaker:then by the end of the first year,
Speaker:that $100 will have grown to $103.
Speaker:But the following year,
Speaker:you won’t just earn interest on that initial $100 - you’ll be earning interest on $103,
Speaker:which means that your account will earn $3.09 in interest instead of $3.00.
Speaker:So the year after that,
Speaker:you’d be earning interest on $106.09,
Speaker:so on and so forth.
Speaker:After 20 years at this rate,
Speaker:your initial $100 will have grown to $180.61.
Speaker:Simple interest,
Speaker:on the other hand,
Speaker:is interest that’s only paid on the principal sum.
Speaker:So in the previous example,
Speaker:if you had a simple interest rate of 3% rather than a compound interest rate,
Speaker:you would only earn $3.00 in interest every year,
Speaker:no matter how much money you had accrued in interest.
Speaker:After 20 years on a simple interest rate,
Speaker:your account would only have grown to $160.
Speaker:With compound interest,
Speaker:the exact same amount of money at the exact same interest rate would make you $20 more.
Speaker:And while that may not seem like much,
Speaker:if you have 30,
Speaker:40,
Speaker:or 50 years to let your money sit and accrue interest,
Speaker:compound interest could potentially make you $40,
Speaker:$60,
Speaker:or even $80 more than simple interest.
Speaker:Another important concept is the difference between APR and APY. APR,
Speaker:or annual percentage rate,
Speaker:is the annual rate of interest that doesn’t factor in compounding.
Speaker:APY,
Speaker:or annual percentage yield,
Speaker:on the other hand,
Speaker:is the annual percentage rate that reflects the entire amount of interest paid on the account,
Speaker:including interest that’s been compounded.
Speaker:Both of these numbers reflect the amount of interest paid on a 365-day period (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:When considering an account in which to invest,
Speaker:you can use a simple formula to calculate how much money you’ll earn annually off the initial investment.
Speaker:The compound interest formula is A=P(1+r/n)(^nt).
Speaker:This might look complicated,
Speaker:but it’s actually quite straightforward.
Speaker:The “P” in the formula stands for the principal amount,
Speaker:or the initial sum of money that you’ve invested into the account.
Speaker:“R” is the interest rate,
Speaker:and should be entered into the formula as a decimal amount.
Speaker:So if the interest rate is 3%,
Speaker:you should enter it into the formula as 0.03.
Speaker:“N” is the number of times interest is compounded in a single year.
Speaker:So if interest is compounded yearly,
Speaker:N would be entered into the formula as 1.
Speaker:The “t” in “nt” is the amount of time that the money is invested for.
Speaker:So if you plan to let your investment sit for 20 years,
Speaker:and interest is compounded annually,
Speaker:then nt would be entered into the formula as 1(20).
Speaker:Remember that “nt” is an exponent.
Speaker:So if the interest is compounded once a year for 20 years,
Speaker:you will take the number inside the first set of parentheses and raise it to the 20th power,
Speaker:and multiply that number by P (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:Let’s look at an example to get a good idea of how the formula works.
Speaker:Imagine that you want to invest $5,000 into an account with an interest rate of 5% that is compounded monthly.
Speaker:Your formula would look like this - A=5,000(1+0.05/12)(^12(10)).
Speaker:First,
Speaker:calculate 0.05/12.
Speaker:Then add 1.
Speaker:Raise that number to the 120th power,
Speaker:since “nt” in this equation is 12 x 10,
Speaker:or 120.
Speaker:Multiply that number by 5,000.
Speaker:If you do the math,
Speaker:you’ll see that the final results are $8,235.05.
Speaker:So in 10 years’ time,
Speaker:your initial investment of $5,000 will have grown to $8,235.05.
Speaker:But if you contribute an additional $5,000 to your account every 10 years,
Speaker:then after 20 years your account will have grown to $21,798.25.
Speaker:Let’s look at a few more examples to really understand how compound interest can be used to make you as much money as possible on your investments.
Speaker:Example One.
Speaker:You have $10,000 to invest for a period of five years.
Speaker:The account you choose has a 3% interest rate that is compounded monthly.
Speaker:At the end of five years,
Speaker:your initial investment will have grown to $11,616.17.
Speaker:If you contribute an additional $10,000 to your account every five years,
Speaker:then after 10 years your account will have grown to $25,109.71 (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:Example Two.
Speaker:You have $10,000 to invest for a period of two years.
Speaker:The account you choose has a 2% interest rate that is compounded quarterly.
Speaker:At the end of two years,
Speaker:your initial investment has grown to $10,404.07.
Speaker:If you contribute an additional $10,000 to your account every two years,
Speaker:then after four years your account will have grown to $21,234.66 (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:Example Three.
Speaker:You have $1,000 to invest for one year.
Speaker:The account you choose has a 5% interest rate that is compounded twice a year.
Speaker:At the end of the year,
Speaker:your initial investment has grown to $1,050.63.
Speaker:If you contribute an additional $1,000 to your account every year,
Speaker:then after two years your account will have grown to $2,154.44.
Speaker:As you can see,
Speaker:compound interest means that the money you invest grows exponentially every time interest on the account is compounded.
Speaker:So if you stick to a regular investment schedule,
Speaker:then every time you raise the principal on the account,
Speaker:you start earning back double and triple the amount that you’re investing.
Speaker:This is why time is on your side when it comes to compound interest.
Speaker:The longer you invest,
Speaker:the higher the principal in your account becomes.
Speaker:Soon,
Speaker:you don’t have to invest anything to begin earning back hundreds of times in interest what you initially invested.
Speaker:To understand this concept better,
Speaker:let’s take a look at two best friends.
Speaker:Their names are Ellen and Chandra.
Speaker:When these two women are 20 years old,
Speaker:Chandra decides to open an investment account.
Speaker:Every year,
Speaker:over a period of 20 years,
Speaker:she invests $4,000 at a growth rate of 10% per year.
Speaker:At age 40,
Speaker:she stops contributing her yearly $4,000,
Speaker:but lets her account continue to accrue interest every year until she turns 65 years old.
Speaker:When she finally decides to withdraw,
Speaker:she will have almost $3 million in her investment account.
Speaker:Now let’s take a look at Ellen.
Speaker:She doesn’t decide to open an investment account until age 40.
Speaker:Her plan is identical to Chandra’s.
Speaker:Her plan is to invest $4,000 every year until she turns 65 years old.
Speaker:She will actually be contributing more money to her account,
Speaker:saving over a period of 25 years.
Speaker:That’s five more years (or $20,000)
Speaker:than Chandra.
Speaker:Her growth rate is also 10% annually,
Speaker:the same as Chandra’s.
Speaker:But at age 65,
Speaker:when she goes to withdraw,
Speaker:she will barely have $500,000 in her account.
Speaker:That’s 600% less profit than Chandra (Robbins Research International,
Speaker:Inc.,
Speaker:2020)!
Speaker:Chandra actually contributed less money,
Speaker:and saved for less time.
Speaker:But because she had an additional 25 years to let her savings grow,
Speaker:she made substantially more money than her friend who started saving later in life.
Speaker:Compound interest means gathering interest on top of interest.
Speaker:So the longer you can let your savings accrue,
Speaker:the more money you stand to make,
Speaker:no matter how small your regular investments are (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:No matter how old (or young)
Speaker:you are,
Speaker:the time to start investing is now.
Speaker:Don’t wait for that big bonus or raise to open an investment account.
Speaker:You may not think you have enough money to spare toward a regular investment schedule,
Speaker:but people of all incomes have the ability to invest.
Speaker:If you’re still skeptical,
Speaker:meet William.
Speaker:He’s 20 years old.
Speaker:He still has two more years of college left to go,
Speaker:but he’s already accrued $60,000 worth of student debt.
Speaker:He’s working part-time at a minimum wage job to pay his rent while he’s in school.
Speaker:He has no savings,
Speaker:no assets,
Speaker:and until he starts paying back his student loans,
Speaker:no credit.
Speaker:But he’s going to the back to open an investment account.
Speaker:His investment schedule?
Speaker:$1 a week.
Speaker:That’s right,
Speaker:$1 a week.
Speaker:That’s $4 a month.
Speaker:At an APY of 0.25%,
Speaker:his savings will grow to $527 after 10 years.
Speaker:It will grow to $1,067 after 20.
Speaker:After 20 years,
Speaker:he can choose to increase his contributions,
Speaker:or he can stop,
Speaker:and let that $1,067 continue to accrue interest for another 25 years until he retires.
Speaker:If he increases his weekly contribution to just $10,
Speaker:at the same interest rate,
Speaker:he’ll have $5,266.60 in savings after 10 years,
Speaker:and $10,665 after 20 years,
Speaker:which he can then let sit and accrue interest for an additional 25 years before he retires.
Speaker:Compound interest basically supercharges your savings account.
Speaker:The more you have in savings,
Speaker:the more interest you accrue.
Speaker:The more interest you accrue,
Speaker:the more interest you accrue on that interest.
Speaker:Though it starts slow,
Speaker:especially if you don’t have much to contribute in the beginning,
Speaker:it doesn’t take long for your profits to start doubling and tripling every year.
Speaker:Even a basic savings account at your personal bank can be set up with compound interest.
Speaker:This investment account is by far the least risky.
Speaker:However,
Speaker:most U. S. accounts have extremely low APYs.
Speaker:Like William,
Speaker:the interest rate on a basic savings account is most likely to be well under 1%.
Speaker:This is why defensive investors tend to put their money into investment accounts that will earn them a bit more money.
Speaker:Account types such as Roth I. R. A.,
Speaker:SEP I. R. A.,
Speaker:401(k),
Speaker:or Coverdell ESA are all very low-risk,
Speaker:secure places to invest your money where it’s fairly easy to find APYs at 1 or 2%,
Speaker:if not more.
Speaker:Most of these accounts are retirement accounts,
Speaker:and are set up with the understanding that you are not going to be withdrawing your money until you reach retirement age.
Speaker:Coverdell ESA accounts are education accounts that parents can open when their children are born and regularly contribute to until their child is ready to go to college,
Speaker:at which point they can withdraw their savings and all the compound interest they’ve accrued over the years (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:So even if you only have $1 a week or $5 a month to spare,
Speaker:now is the time to start investing your money.
Speaker:Slowly but surely,
Speaker:that $5 will start to grow into something much bigger.
Speaker:And if you get a better job or a raise,
Speaker:maybe you can turn that $5 a month into $5 a week,
Speaker:which will exponentially increase your earnings thanks to the compound interest that you accrue with each investment (Robbins Research International,
Speaker:Inc.,
Speaker:2020).
Speaker:The Rule of 72 Don’t over-complicate investing - keep it simple,
Speaker:and timeless.
Speaker:Nowakowski,
Speaker:A. (n.d.).
Speaker:Man sitting in front of the laptop [photograph].
Speaker:Retrieved from https -//unsplash.com/photos/MFms-wkv3Ow The beauty of compound interest is that it’s essentially free money.
Speaker:It’s money that you earn without having to do a thing.
Speaker:But as you’ve already experienced,
Speaker:determining how much money you stand to make based on principal,
Speaker:regular contributions,
Speaker:and interest rate can require a great deal of math.
Speaker:If your head is spinning from all the numbers,
Speaker:letters,
Speaker:and formulas,
Speaker:don’t worry.
Speaker:The website moneychimp.com has a handy compound interest calculator that helps investors to determine how much they stand to earn in compound interest from current or potential accounts.
Speaker:The calculator will ask you for the amount of the current principal,
Speaker:as well as the amount of future additions,
Speaker:which will save you from manually calculating the compound interest formula for every single additional investment.
Speaker:The compound interest calculator will also ask you how many years you plan to make these additional investments,
Speaker:your current interest rate,
Speaker:and how many times interest is compounded on the account annually.
Speaker:You can use the calculator to determine both how much money you stand to make while you’re saving,
Speaker:and find out how much the account will grow once you’ve invested your planned amount (moneychimp.com,
Speaker:2020).
Speaker:Let’s look at a few examples.
Speaker:Imagine that you’re considering opening an investment account.
Speaker:The APY for the account is 20%.
Speaker:You would like to make an annual investment of $1,000 into the account over the course of the next 20 years,
Speaker:bringing your overall investment to $20,000.
Speaker:To start out,
Speaker:your principal amount is only $1,000.
Speaker:The annual addition to the account will also be $1,000,
Speaker:as that’s the total amount of your annual investments.
Speaker:Years to grow will be 20,
Speaker:as that’s how many years you plan to invest $1,000/year into the account.
Speaker:The APY is 20%,
Speaker:so you can enter that into the calculator as a 20% interest rate compounded 1 time annually.
Speaker:Choose to make your additions at the “start” rather than at the “end” of each compounding period.
Speaker:At this rate,
Speaker:your account will swell to a staggering $262,363.20 at the end of 20 years.
Speaker:And if you’ve opened this account while you’re still in your 20s,
Speaker:you can let that $262,363.20 sit and accrue interest for an additional 20 years before you retire.
Speaker:20%,
Speaker:however,
Speaker:is a remarkably high-interest rate,
Speaker:one that you’re probably only going to find on a very risky stock market purchase.
Speaker:Let’s look at another example that’s slightly more “realistic."
Speaker:Imagine that you have $1,500 to invest every 6 years,
Speaker:for a total of 24 years.
Speaker:The account that you’ve chosen has an interest rate of 4.3%,
Speaker:which is compounded quarterly.
Speaker:To use the compound interest calculator,
Speaker:begin by entering $1,500 into the principal amount,
Speaker:as you’ve just opened the account.
Speaker:You don’t plan to invest another $1500 for another 6 years,
Speaker:so divide $1500/6 to determine the annual addition amount.
Speaker:If you do the math,
Speaker:you’ll find that you only have to invest $250/year in order to invest $1500 into your account every 6 years.
Speaker:In the compound interest calculator,
Speaker:enter $250 into the annual addition slot.
Speaker:Enter 24 under “years to grow."
Speaker:Enter 4.3% into the interest rate slot,
Speaker:and enter 4 into the slot for how many times interest is compounded annually.
Speaker:Choose to make additions at the “start."
Speaker:You’ll see that,
Speaker:if you invest just $250 into your account over a period of 24 years,
Speaker:your account will swell to $14,713.13.
Speaker:Not a bad savings.
Speaker:But if you opened this account while you were still in your 20s,
Speaker:you now have another 20 years to let that $14,713.13 sit in your account and continue to accrue interest until you retire.
Speaker:To find out how much money you’ll have when you’re finally read to withdraw,
Speaker:go back to the compound interest calculator.
Speaker:This time,
Speaker:enter $14,713.13 as the principal amount.
Speaker:Enter “0” for the annual additions amount,
Speaker:as you have already invested what you wanted to invest.
Speaker:Leave the rest of the selected fields the same - 4.3% interest,
Speaker:compounded 4 times annually at the “start."
Speaker:Choose 20 years for the “years to grow” slot.
Speaker:You’ll see that,
Speaker:if you let your savings continue to accrue interest for the next 20 years,
Speaker:you’ll have $34,610.28 in your account when it comes time for you to retire.
Speaker:While moneychimp.com’s and other compound interest calculators greatly simplify the math involved in understanding how much you have to make from a potential investment,
Speaker:when choosing where to invest their money,
Speaker:many investors simply use the Rule of 72 to determine where and how to make the most money possible on their investments (Elkins,
Speaker:2020).
Speaker:The Rule of 72 focuses on one specific component of the compound interest formula,
Speaker:and that’s the interest rate itself.
Speaker:As you may have intuited,
Speaker:the higher your interest rate,
Speaker:the faster your investment will begin to make money,
Speaker:while a lower interest rate will only make you money if you have a long time to let your money sit and accrue (Elkins,
Speaker:2020).
Speaker:The Rule of 72 is as follows - 72/interest rate=years to double.
Speaker:If you plug your interest rate into this formula,
Speaker:it will tell you how many years it will take,
Speaker:at your current interest rate,
Speaker:for the money you’ve invested to double.
Speaker:This rule stands no matter how much money you initially invest.
Speaker:So if you’re planning to invest $10,000,
Speaker:the Rule of 72 will tell you how long you’ll have to wait at your current interest rate to earn $20,000.
Speaker:The rule is based on a 1% interest rate.
Speaker:So if you open an account with an APY of 1%,
Speaker:it will take 72 years for you to double your money.
Speaker:An APY of 3%,
Speaker:on the other hand,
Speaker:will only take 24 years to double,
Speaker:as 72/3=24.
Speaker:An APY of 6% will only take 12 years to double,
Speaker:etc.
Speaker:When using the Rule of 72,
Speaker:remember that the “interest rate” that you’re entering into the formula is the amount of interest you can expect to accrue in an entire year,
Speaker:or 365-day period.
Speaker:So if your account accrues interest twice a year or quarterly at a rate of 1%,
Speaker:then 1% isn’t necessarily the amount of interest you can expect to accrue over the course of an entire year.
Speaker:This is why the more frequently your account compounds interest,
Speaker:the more money you stand to make.
Speaker:The Rule of 72 also helps to make it clear why a standard U. S. savings account is probably not going to cut it for the average investor.
Speaker:The average APY of a U. S. Savings account today is 0.09%.
Speaker:According to the Rule of 72,
Speaker:it will take 800 years for your invested money to double at that rate.
Speaker:You’ll still be making money,
Speaker:but not nearly as much as you could be making if you chose to invest that money elsewhere.
Speaker:Those with a great deal of money ready to invest often choose to invest in a high-yield savings account or a certificate of deposit,
Speaker:both of which typically offer interest rates around 2.49%,
Speaker:significantly higher than the average APY of a standard savings account.
Speaker:However,
Speaker:these accounts rarely prove profitable for those who don’t have a large sum of money to invest initially,
Speaker:or who don’t have the funds to make large regular investments over the course of several years.
Speaker:If you invest your money in the stock market,
Speaker:on the other hand,
Speaker:whether it’s through an employer-sponsored 401(k)
Speaker:account,
Speaker:a traditional Roth I. R. A.,
Speaker:or an individual brokerage account,
Speaker:you’re almost guaranteed to make much bigger returns,
Speaker:no matter how small your investments are.
Speaker:The average annualized total return over the past 90 years for S&P 500 accounts is 9.8%.
Speaker:And if you adjust that number for inflation,
Speaker:the return percentage still hovers between 7-8%.
Speaker:Plug 7% into the Rule of 72,
Speaker:and you’ll see that it would take just over 10 years for your money to double (Elkins,
Speaker:2020).
Speaker:To go back to our previous example,
Speaker:let’s imagine that you choose to invest your money in the stock market rather than a standard savings account.
Speaker:Imagine that you choose to invest in an S&P 500 account,
Speaker:and your average growth rate every year is 7%.
Speaker:Using the Rule of 72,
Speaker:you know that it will take a little over 10 years for your money to double at this rate.
Speaker:So imagine that you make an initial investment of $1,500,
Speaker:with the plan to invest an additional $250/year for the next 24 years.
Speaker:At 7% interest compounded annually,
Speaker:your account will grow to $23,170.81 after 24 years (Elkins,
Speaker:2020).
Speaker:Another interesting exercise is to plug the interest rates of your credit cards,
Speaker:car loans,
Speaker:mortgage,
Speaker:or student loans into the Rule of 72 to see just how much money your outstanding debt is earning your creditors.
Speaker:Remember that the average annual interest rate for a standard U. S. savings account is only 0.09%.
Speaker:But the average annual interest rate for a credit card in the United States is 17.3%.
Speaker:At that rate,
Speaker:it will only take 4.16 years for the bank to earn back double what you initially charged on the card.
Speaker:And with a credit card or any other kind of loan,
Speaker:that extra money is coming out of your pocket.
Speaker:The reason that a low-interest rate on a loan is the same reason that a high-interest rate on an investment account is desirable - time.
Speaker:Applying the Rule of 72 to future financial decisions can save you quite a bit of money,
Speaker:whether you’re looking to take out a loan or invest your money.
Speaker:The Rule of 72 can help you determine what a reasonable interest rate is,
Speaker:and prevent you from falling prey to financial gimmicks from potential creditors or investing your money in accounts that ultimately aren’t going to earn you that much money.
Speaker:Berkshire Hathaway And Compound Interest.
Speaker:Wall Sreet,
Speaker:In New York City,
Speaker:Is Home To The New York Stock Exchange (N. Y. S. E. ).
Speaker:Weissenberger,
Speaker:P. (n.d.).
Speaker:Greyscale photo of wall st. signage [photograph].
Speaker:Retrieved from https -//unsplash.com/photos/uJhgEXPqSPk Warren Buffett is undoubtedly one of the globe’s most successful investors.
Speaker:In fact,
Speaker:a total net worth of $88.9 billion places him at the fourth-wealthiest person on the planet.
Speaker:While Chief Executive Officer of the investment bank Berkshire Hathaway,
Speaker:he made his investors an unprecedented 2 million percent return on their money over the course of his 52-year career.
Speaker:To translate that into real numbers,
Speaker:if you invested $10,000 into Berkshire Hathaway in 1965,
Speaker:your investment would now be worth $88 million (MacKay,
Speaker:2020).
Speaker:Undoubtedly,
Speaker:1965 was a long time ago.
Speaker:But growing an investment by that much is almost unheard of.
Speaker:Warren Buffett’s secret,
Speaker:as he himself has said many times,
Speaker:is playing the long-game.
Speaker:He never expects to make himself or his investors money overnight.
Speaker:He understands that,
Speaker:while compound interest is powerful,
Speaker:it’s a lot more powerful over a long period of time (MacKay,
Speaker:2020).
Speaker:Compound interest is a “snowball” effect.
Speaker:The more money you have in your account,
Speaker:the more money you make.
Speaker:It’s a deceptively simple idea,
Speaker:so simple that it’s often overlooked or never considered at all by the average investor.
Speaker:In the words of Albert Einstein,
Speaker:compound interest is what makes the world go round.
Speaker:“He who understands it,
Speaker:earns it… he who doesn’t… pays it."
Speaker:Buffett is the star example of playing the long game because he started investing much earlier than most people.
Speaker:According to him,
Speaker:the book that changed his life was called One Hundred Ways to Make $1,000,
Speaker:a title that he found in the public library in his hometown of Omaha,
Speaker:Nebraska at age 7.
Speaker:Inspired by this book,
Speaker:he started his first business selling chewing gum,
Speaker:Coca-Cola bottles,
Speaker:and magazines door-to-door in his neighborhood.
Speaker:In middle school,
Speaker:he got a job working in his grandfather’s grocery store.
Speaker:Using the money he earned at the grocery store,
Speaker:he bought his first stock at the tender age of 11.
Speaker:Specifically,
Speaker:he purchased three shares of Cities Service stock for himself,
Speaker:and three for his sister Doris Buffett.
Speaker:He was inspired to do so after a visit to the New York Stock Exchange with his family the year before.
Speaker:In high school,
Speaker:he invested the money he earned delivering newspapers into a business owned by his father.
Speaker:He earned his spending money selling golf balls and stamps,
Speaker:as well as detailing cars.
Speaker:As a sophomore in high school,
Speaker:he got into business with a friend purchasing used pinball machines and then selling them to local businesses.
Speaker:When he graduated from Woodrow Wilson High School in Washington,
Speaker:D. C. in the year 1947,
Speaker:the tagline under his senior yearbook pictures reads “likes math;
Speaker:a future stockbroker."
Speaker:That same year,
Speaker:between the stocks he had purchased when he was 11 and the money he had invested in his father’s business,
Speaker:he had already managed to accumulate a savings of $9,800,
Speaker:roughly $105,000 in today’s money.
Speaker:And because his money has been accruing interest for so long,
Speaker:he’s managed to earn back 99% of his wealth since his 50th birthday.
Speaker:The interest that he’s making on his investments is earning him hundreds of thousands of dollars every day,
Speaker:but it’s because he started investing so early in his life (MacKay,
Speaker:2020).
Speaker:Buffett began his career as an investor in 1954,
Speaker:working under Benjamin Graham,
Speaker:the investor who invented the Mr. Market analogy for understanding stock market psychology.
Speaker:According to him,
Speaker:Graham was an extremely tough person to work for,
Speaker:demanding that all the company’s stocks provide a wide margin of safety in addition to a high rate of annual return.
Speaker:Buffett’s starting salary at Graham’s company was $12,000 a year,
Speaker:about $114,000 today.
Speaker:After just two years,
Speaker:Graham closed up his partnership,
Speaker:but during that time,
Speaker:Buffett had been investing his money.
Speaker:In 1956,
Speaker:he had accrued a personal savings of $174,000,
Speaker:worth about $1.64 million today.
Speaker:He used a portion of this money to start his own hedge-fund like investment business called Buffett Partners Ltd.
Speaker:He ran for Buffett Partners Ltd. for 14 years.
Speaker:By 1962,
Speaker:Buffett’s partnerships were collectively worth more than $7 million,
Speaker:of which more than $1 million belonged to Buffett himself.
Speaker:Eventually,
Speaker:he merged Buffett Partners Ltd. with a few other partnerships to form Berkshire Hathaway,
Speaker:the company where he would remain Chief Executive Officer for the next 52 years (MacKay,
Speaker:2020).
Speaker:It was during his time at the head of Berkshire Hathaway that he began teaching others how to invest their money in smart and secure ways.
Speaker:During this time,
Speaker:his investments were continuing to accrue interest,
Speaker:making him hundreds of thousands of dollars every year.
Speaker:But in order to let his money continue to grow,
Speaker:he let his investments sit,
Speaker:and lived solely off of his annual salary of $50,000/year.
Speaker:By the year 1990,
Speaker:Buffett would be worth over a billion dollars.
Speaker:In 2008,
Speaker:Buffett became the richest man in the world,
Speaker:overtaking Bill Gates for the top spot.
Speaker:While Gates managed to reclaim his crown in 2009,
Speaker:the power of Buffett’s investments is not to be underestimated.
Speaker:In August 2014,
Speaker:a single Berkshire Hathaway share was valued at $200,000,
Speaker:and the price hasn’t fallen far since.
Speaker:Over the years,
Speaker:he’s become an incredibly popular and respected investment coach,
Speaker:partly because of his success,
Speaker:but partly because of the unique way he uses stories to illustrate abstract investment concepts (MacKay,
Speaker:2020).
Speaker:One such story refers to Queen Isabella’s choice to fund Christopher Columbus’ voyage to the New World.
Speaker:This kind of investment,
Speaker:he jokingly states,
Speaker:was quite risky indeed,
Speaker:more of a speculative venture than a sound investment.
Speaker:Had she chosen to deposit the $30,000 worth of today’s money that she used to fund Columbus’ expedition into an investment account instead,
Speaker:at an annual interest rate of 4%,
Speaker:the nation of Spain would be worth over $7 trillion from that account alone.
Speaker:Such is the power of compound interest (Miller,
Speaker:2016).
Speaker:Another historical example Buffett commonly uses is the story of King Francis,
Speaker:who chose to commission the painting of the Mona Lisa in 1516.
Speaker:In today’s money,
Speaker:the king paid Leonardo da Vinci about $20,000 for the painting.
Speaker:Had he chosen to invest that money at an annual interest rate of 6%,
Speaker:the nation of Italy would be worth more than $1 quadrillion from that account alone.
Speaker:Buffett regularly used both of these examples to discourage the idea that speculative investments,
Speaker:including high-risk business ventures,
Speaker:art,
Speaker:and property investments,
Speaker:can earn investors more money than traditional stock market purchases or retirement accounts (Miller,
Speaker:2016).
Speaker:It’s not a sexy answer to the question of earning money.
Speaker:Smart investing is slow work,
Speaker:there’s no doubt about it.
Speaker:But the trick behind compound interest is that,
Speaker:while it works at a slow pace,
Speaker:it doesn’t necessarily work at a steady one.
Speaker:In the beginning,
Speaker:your money will grow slowly,
Speaker:because you don’t have as much principal in your account.
Speaker:But as the principal sum in your account grows,
Speaker:the more interest you make.
Speaker:And the more interest you make,
Speaker:the more interest you make on that interest.
Speaker:Before you know it,
Speaker:it’s taking just a few years to double your initial investment amount,
Speaker:when it took you 10 or even 20 years to double it the first time (Miller,
Speaker:2016).
Speaker:Investing your money doesn’t just help you to save - it helps you to earn.
Speaker:Invested money works for you while it’s sitting in its account accruing interest.
Speaker:Think of it like an athlete training and perfecting his technique.
Speaker:It might take him 28 years of training to finally win a gold medal in the Olympics,
Speaker:but every year that he competes,
Speaker:he’s compounding the work that he put in last year,
Speaker:and the year before,
Speaker:and the year before.
Speaker:His strength and skill don’t increase at a steady rate.
Speaker:His experience increases his strength and skill exponentially every time he competes.
Speaker:To look at yet another of Buffett’s common financial anecdotes,
Speaker:let’s go back to the year 1626.
Speaker:This is the year that the Manhattan Indigenous Nation sold their island home to a Dutch explorer named Peter Minuit for the price of $24.
Speaker:In 1965,
Speaker:the first time Buffett told this story,
Speaker:he estimated the land value of the island at that time to be around $12.5 billion.
Speaker:This,
Speaker:he calculated,
Speaker:worked out to be an annual gain of 6.12%.
Speaker:While this is hardly a bad interest rate,
Speaker:he calculates that,
Speaker:had what he calls the “Tribal Mutual Fund” managed to earn back 6.5% per year,
Speaker:their initial $24 would now be worth $42 billion.
Speaker:And had they managed to earn back 7%,
Speaker:that value makes a huge leap up to $205 billion.
Speaker:This story doesn’t just demonstrate the power of compound interest,
Speaker:but it demonstrates just how much money even a 0.4% increase in annual returns can make the investor.
Speaker:Half a percentage point won’t matter much in the short term.
Speaker:But over time,
Speaker:it can quickly grow to be worth hundreds of thousands of dollars every year.
Speaker:As always,
Speaker:the key ingredients are time and patience.
Speaker:The longer you have to wait,
Speaker:the more money every single percentage point will make you,
Speaker:year after year (Miller,
Speaker:2016).
Speaker:This has been
Speaker:The Timeless Investment Strategy:
Speaker:Everything You Need To Start Making Money In The Stock Market Today (Investpreneurs Book 1)
Speaker:Written by
Speaker:Bill Grand
Speaker:Narrated by Russell Newton.
