Here’s an interesting question: If there is a lily pad in a pond, and it doubles in size every day, how many more days would it take for it to cover the entire pond if it had covered half the pond after 28 days? There are no prizes for guessing, but the correct answer is simple: Just one (think it through if you don’t get it, but please come back when you’re done!). For me, this illustrates the power of compound interest. And in investing, it can be an extremely powerful force. The problem though, is that
Here’s an interesting question: If there is a lily pad in a pond, and it doubles in size every day, how many more days would it take for it to cover the entire pond if it had covered half the pond after 28 days?
There are no prizes for guessing, but the correct answer is simple: Just one (think it through if you don’t get it, but please come back when you’re done!). For me, this illustrates the power of compound interest. And in investing, it can be an extremely powerful force.
The problem though, is that compound interest takes time to work which might turn some people off. But on the flip side, getting time itself to be your ally in investing is also one of the simplest things you can do as an investor – you just have to buy… and then wait.
As shared by my American colleague Morgan Housel, the following is one of my favourite stories on how the simple act of being patient with your investments can mean a world of difference:
“There’s a saying that there’s always someone on the other side of your trade, and that someone may know more than you. I thought of this last week while reading the biography of Joseph Kennedy.
Kennedy’s wealth came from a mix of genius and a sheer lack of morals. Take this story: The repeal of prohibition in 1933 was bound to benefit companies that made supplies needed to make alcohol. One was a bottling company called Owens-Illinois. Rather than investing in directly in Owens-Illinois, Kennedy purchased shares of a company called Libbey-Owens-Ford. “Libbey-Owens-Ford was an entirely separate company, which manufactured plate glass for automobiles, not bottles, but its name was close enough to the bottle glass company to fool unwary investors,” writes biographer David Nasaw. On news of the repeal, Kennedy and his partners traded shares back and forth between each other, pumping up trading volume to draw attention. That caused other investors to buy shares “on the mistaken belief that they were buying shares of Owens-Illinois, the bottle manufacturer.” After a surge, Kennedy dumped Libbey-Owens-Ford with a $1 million inflation-adjusted profit and invested the proceeds in his original target, Owens-Illinois.
…Companies didn’t report much information in the 1930s, but archive documents show Libbey-Owens-Ford earned somewhere around $1.1 million in profit in 1933. By 1985, profits were more than $70 million. Getting tricked by Kennedy didn’t matter much if you were willing to wait.”
There are many other benefits to having patience in investing. For instance, with more than a century of history, the American share market has been shown to have dramatically lower odds of losing money the longer one stays invested. It’s also the same sort of relationship that the Straits Times Index (SGX: ^STI) has with time, although historical data for it only goes back to 1988.
In other cases – like with Raffles Medical Group (SGX: R01) – being willing to wait allowed the market to eventually reflect the growth in the businesses of fundamentally strong companies in the form of substantially higher share prices.
A friend’s mom also showed me once the power of patience. Here’s what I wrote about it previously:
“More than 36 year ago in 1978, my friend’s mom (let’s call her Mrs Lee) had bought S$1,800 worth of shares in what was then the Singapore Bus Service. In 1980, Mrs Lee bought another chunk of shares in the same company for S$2,000 and has held onto every share since then.
Over the years, through a series of corporate actions, early shareowners of Singapore Bus Service (like Mrs Lee) would have wound up with shares in both ComfortDelGro Corporation (SGX: C52) and SBS Transit (SGX: S61) if they had never sold.
And guess what? That S$3,800 investment Mrs Lee had made in 1978 and 1980 has today, grown to become S$42,300 (as of today, Mrs Lee owns 16,000 shares of ComfortDelGro and 1,200 shares of SBS Transit, all of which came from her initial investments in Singapore Bus Service).”
Analyst Eddy Elfenbein once said that “successful investing is one of the few endeavours in which people are convinced it must be more complicated than it truly is.” I’m not convinced that it must be more complicated. On the contrary, I’m convinced that there are simple ways to invest well – and that is to invest for the long-term, letting time be on your side.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group.