April 22, 2021
3 minutes of reading
This story originally appeared on ValueWalk
Groucho Marx – yes, that Marx – as Otis P. Driftwood in “A Night at the Opera” (1935), insisted on proposing to Margaret Dumont, the widow Claypool, when he kept an eye on her new $ eight million inheritance.
Groucho always slyly deflects inference encourage:
“You can hardly call me an asset hunter. Because when I first proposed to Mrs. Claypool, I thought she had seven million dollars. But the extra million has never hindered my love for her ”.
Groucho’s wittyism holds a profound but little observed truth:
There is little difference between getting eight or seven million dollars.
But all the difference in the world between a million and no.
In finance, there is no single number.
The number that most of us start with.
Legendary investor Charlie Munger Observed clearly, the first step out of poverty is the most difficult:
“The first $ 100,000 is a bitch, but you have to do it. I don’t care what you have to do – if that means walking around and not eating anything that wasn’t purchased with a coupon, look for a way to get $ 100,000. Then you can reduce the throttle a bit. “
Why endure that first 100 thousand dollars at the beginning of a working life, when it is difficult to make a living?
Isn’t it easier to wait, save after your earning power increases?
Well, Charlie likes to leave a little bit of mystery behind in his statements.
Solve Charlie’s mystery
Let’s solve that mystery.
Add Charlie’s $ 100k over a fifty-year uninterrupted working life, in a tax-free retirement account, earning between 4 and 10% per annum.
Note that the final 10% figure is the historical profit of S&P 500, which Charlie warned may not characterize future years, so less numbers are included:
4% – $ 731.601
5% – 1,199,516 USD
6% – 1,996,302 USD
7% – $ 3,212,799
8% – $ 5,248,486
9% – $ 8,563,737
10% – $ 13,956,389
You have company.
Most people simply don’t understand the power of compounding.
“The greatest shortcoming of mankind is that we cannot understand exponentials. – Albert Allen Bartlett, Physicist
That’s how tens of millions of your fellow Americans suffer heavy losses every month by compound interest on credit cards debt.
“The Snowball” – most recent Warren Buffett biography – is Warren’s metaphor of the safest and surest path to wealth accumulation:
Roll a financial snowball down the longest hill you can find and watch it grow!
Charlie’s figure for that snowball: $ 100K.
Why is a hill long?
Getting the earliest start – when you’re young – for the longest period of time gives you the ability to accumulate dual wealth and accumulate the greatest wealth of your lifetime.
Not a bit.
As Charlie said,
“Understanding both the power of compound interest and the difficulty of acquiring it is the heart and soul of understanding many things.”
Albert Einstein, a physicist who divided the relationship of matter and energy in a simple formula, E = mc2, said:
“Compound interest is the most powerful force in the universe. Those who understand it, earn it. Who doesn’t, pay it ”.
With an apology to the poet John Keats,
“Wealth is compound interest and compound interest is richness. That’s all Ye knows about finance and all you need to know. ”
Would you know more, about life and finances, dare not miss Warren and Charlie, together again on the world financial stage, at the annual Berkshire Hathaway meeting, at https://finance.yahoo.com/brklivestream
on Saturday, May 1 at 12:30 PM ET.