Friday, August 9, 2019

Compound



Usually when someone says "invest," what they really mean is "compound." It has often been quoted that Einstein remarked that the power of compounding was beyond human comprehension. That very well may be true, but seeing something visually should offer some understanding of the phenomenon.

Consider the leading image of this post; it is almost an ideal example of what is possible over a long-term (10 years) with a stock that compounded some 1070.36% (ten-bagger in Wall Street parlance) earning the holder a $107,048.51 profit from an original investment of $10,000.

What's nice about this example is that it includes the purchase date and hold date exactly, the purchase price, end price, dividends, and the average annual total return. Those factors are very telling.

Successful compounding almost always involves 3 vital factors: security selection, holding time, and either additional paid-in capital or dividends. These 3 variables, when working in concert, can produce extraordinary results as the above indicates; for every $1 invested the owner received $11.70 in return a decade later. For every $9.60 paid per share in 2009, $6.80 was returned in dividends alone!

These are the growth stars every investor and portfolio manager should constantly be on the look for while screening for stocks. How do you find them? With questions! Does the company offer consumable products that need to be continuously repurchased? Does the company pay a dividend? What rate? What is the growth rate of the dividend? How stable is the dividend? Is this company a monopoly? What's the competition like? Is their product dangerous or subject to regulation?

There's an old adage that Financial Famers like you who read this blog know well, "invest your time before your money." The fruition of these words can be found in results like the above example which can have a meaningful impact on an investor's life both now and in the future.