Investing grows your wealth, especially if you reinvest your profit. This is known as “compounding returns,” which is the process of profits making profits.
When you reinvest your profits over long periods of time, your wealth grows much faster, enabling you to leave a lasting legacy for your family which continues to grow over generations. Albert Einstein famously said,
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
In this article, we’ll discuss how compounding works, and how you could use it to growth your wealth and support your family for generations.
The wonders of compounding returns
Underlying the extraordinary power of compounding is simple mathematical logic which may elude our linear-thinking brains. Here are some examples throughout history.
How a compounding grain of rice can bankrupt a nation
One of the oldest stories about compounding comes from ancient India. Legend has it that when the creator of the chess game presented it to the emperor, he was so impressed that he asked the inventor to name his reward.
The creator humbly requested that a single grain of rice be placed on the first square of the chess board, and to double the number of grains on the next square each day, until the final 64th square. So, it would be one grain of rice on the first day, two on the second day, four on the third day, eight on the fourth day, and so on. The emperor agreed.
What the emperor did not realize is that more than 18 quintillion grains of rice, equivalent to some 500 billion tonnes, would be needed by the 64th square. With annual world production of about 500 million tonnes of rice, this is the equivalent of 1,000 years of the entire world production. Unfortunately, the inventor of chess did not benefit from his knowledge of compounding, and legend has it that he lost his life for this trickery.
How $180 became $7.2 million
In more modern times, investors have also taken advantage of compounding returns. With enough time and a sensible investment, wealth can grow exponentially.
In 1935, in the midst of the Great Depression in the U.S., Grace Groner, a modest secretary, spent $180 (equivalent to about $3,500 in 2020) to buy just three shares in Abbott Laboratories, where she worked.
Groner held her shares for 75 years and reinvested her dividends. The shares grew in value slowly at first. But after several decades of compounding, they began to grow exponentially. Over 13 recessions, Groner made profits on her profits. By the time of her death in 2010, she had bequeathed her investment to a charity to help further education. It was valued at more than $7.8 million.
Had Groner bought the shares in 1945, her investments would have been worth $1.7 million by 2010, $6.1 million less. This illustrates the dramatic effect of compounding over 10 additional years.
Of course, Grace Groner was very lucky. We would never recommend investing a substantial portion of your wealth in the shares of a single company, let alone holding them for 75 years. But luck alone would not have made her wealthy without the incredible power of compounding over time.
Growing wealth over generations
The legendary investor Warren Buffet once said,
If you don’t find a way to make money while you sleep, you will work until you die.
Compounding returns do exactly that, they grow your wealth while you sleep. And the best results happen over decades.
One thing that the world’s richest and most influential families seem to have in common is a good eye for investments and a lot of time. The Rothschild family, for example, famously have a 200-year record of growing and preserving their wealth. In the early 1800s, around the time of the Napoleonic wars, they speculated on the stock market. They bought sensible investments and held them. Today they hold a dynasty of businesses and remain spectacularly wealthy.
Like a tree, investments can start very small, as seedlings. But over the years, they can produce branches (profits), and those branches produce more branches. Eventually, just one seed can grow into a powerful and mighty tree, full of branches. Like Grace Groner and the Rothschilds, compounding returns can be truly transformational for strategic investors who are willing to hold their investments long-term.
How can compounding returns benefit your family?
To take advantage of compounding returns, all you need is a good investment and patience.
Investing well and keeping your stock (the “buy-and-hold” strategy) is a firm favorite for leading investors like Warren Buffet and Jack Bogle. Our experts can help you fulfill this.
Finding the right long-term investments for you
When you plan to invest for many decades, you must be willing to assume a higher calculated risk.
For this, you may either try your luck with some of the newer companies on the stock market, or consider the private markets, which offer better long-term risk-adjusted returns.
Leading universities such as Harvard, Yale, Cambridge and Oxford all embrace this style of private investing (known as “endowment investing”) to keep their institutions well-funded. It could also prove to be a good solution for your long-term family prospects too.
To start building your lasting family wealth, speak to your financial experts today.Together, with experience and expertise, we can help you begin your journey of compounding returns.