The Power of Compounding
Compounded Returns can make a real difference.
Aside from the fact that most companies need time to grow, there’s another reason why the long term is an essential ingredient to our investment approach: compounding returns. The power of this mathematical phenomenon should not be underestimated. Consider this excerpt from the 2014 year-end letter written by David Gottesman. It speaks for itself.
"Last month, a valued client of almost 40 years passed away after an illustrious life. His passing led us to report the following figures to the executor of his estate. When our electronic portfolio management recordkeeping began at the end of 1979, the account was valued at $3.9 million. Over the ensuing 35 years, a net $31 million was withdrawn from the account (primarily distributions to the client as well as investment advisory fees), and the account generated approximately $17 million in income. At the end of December 2014, the value of the account was $59 million. That translates to a net compounded return of 13.5% per annum (versus 12.2% for the S&P). If $1 is compounded at 12.2% for 35 years, the result is $56.20; if the same $1 is compounded at 13.5%, the result is $84.11, almost 50% more. A 1+% differential over 35 years equates to 50% more in dollar terms at the end of the period."