The Secret to Compounding Success

Earning an annual compound return of 20% over the long-term on one’s investment portfolio is an incredible achievement for even the best investors.

Warren Buffett, a legend in the business, has so far managed to achieve a compound annual return of ‘only’ 19.4% in the book value of his investment conglomerate over the past five decades from 1965 to 2014.

Meanwhile, John Neff, another luminary in the investing community, had delivered compound annual returns of ‘merely’ 13.7% over his 31 year tenure leading the U.S.-based Windsor fund from 1964 to 1995.

These figures are meant to show how tough it can actually be for one to compound their capital at 20% annually, year-in, and year-out, for decades. Yet, there’s a professional investor whose returns stand out significantly. He’s none other than George Soros.

From 1969 to 1986, Soros, who’s also a noted philosopher and philanthropist, had led his famous Quantum Fund to generate annualised returns of an astonishing 39.4% according to his book The Alchemy of Finance. For some perspective, here’s how a $10,000 investment would look like after 17 years of compounding at 39.4% annually:


At the end of 17 years, you’d end up with more than $2 million – that’s fantastic, especially when considering that an average household in Singapore has a combined annual income of around S$130,000. But, it is worth noting here that even if we can earn such an incredible rate of return, our portfolio will only start seeing some serious gains after the eleventh year, when the annual return clocks in at around $110,000.

There are two key lessons here: 1) we have to be patient enough even if we are a super investor like Soros because compounding takes time to work; 2) even if we let compounding work its magic, we have to resist the enjoyment of spending our gains the moment we earn them.

The second point may need some explaining to bring across its importance. Let’s imagine that you’ve decided to retire and to live off your investment portfolio at the tenth year. What will happen to your portfolio by the end of 17 years?

Compounding table

In each year after Year 11, with you spending $100,000 annually to maintain your household’s lifestyle after retirement, your portfolio will end up being negative in only 15 years after you start investing. That’s a significant difference from what you’d have if you hadn’t spent a cent from your investment portfolio.

This, for me, is a good reason why there aren’t that many super-wealthy investors in the world, especially when it comes to individual investors. Many great investors fall off the compounding-wagon after they think they’ve made enough and start spending what they have instead of letting their capital compound further.

The same smart investor can end up with S$2.0 million in his bank or or a $300,000 hole after 17 years. Who would you rather be?

There're a lot more interesting things about compounding and investing to talk about and if you'd like to do it in person, you can come meet David Kuo and the rest of the Fool Singapore team on August 15! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

You won't want to miss this! Add Invest FAIR Singapore to your calendar today.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.