Time is the best friend of an investor as it allows him or her to tap into compounding returns (or compounding interest, depending on the investment product). As we’ve seen in the temple philosophy section of this website, compounding interest in your bestest of best friends. But time, alone, isn’t enough. The wise investor needs a healthy dose of discipline as well (and you do you need some other things…as covered elsewhere in this website). Time and discipline are far, far more important than being a great stock picker. Well, perhaps that isn’t entirely true but we could fit all of human history’s great stock pickers in a smallish conference room in a random hotel in the city of Fortune (meaning there haven’t been so many of them). For the rest of us, my statement holds.
If you are a 15 to 25 year old, bless you, because this is extra powerful & a special friend for you indeed. Read the below story to see why….
Once upon a time, twins were born to a very humble family of educators living in Davensport, Illinois. Both parents had advanced degrees and taught their children since early childhood that they should be inquisitive, kind and hard working. The children grew up to be fine young adults, each gaining entry into excellent universities.
The girl, who was 18 at the time, put her summer earnings of $2,000 into an investment account that earned 10% per year. She continued to put $2,000 into this account each year until she reached 25. She then forgot about these investments as her life became very challenging indeed (alas, this is a subject of another blog…). In total, she contributed $2,000 for each of 7 years for a total of $14,000. This account compounded annual returns at 10% per year until she reached her retirement age of 65 (by the way, if someone finds such a ‘magic’ account that pay 10% per annum forever, please do let me know. I’m simply trying to make a point about compounding).
Her brother, even though he had the benefit of the same educated upbringing, wasn’t as wise when it can to early investing. Now, it’s well known that boys mature later than girls and he was, sadly, a case in point. His late teens and early twenties witnessed him blowing his investable cash into things long since forgotten. But this isn’t a sad tale - he finally got his act in gear at about the same time, ironically, when his sister stopped her annual investing. So, at age 26, he started investing $2,000 a year into a similar ‘magic’ account…and continued putting in $2,000 a year into this 10% compounding account. By the time he reached 65, he had contributed $80,000 in total.
The wise daughter and the procrastinating son, celebrating their retirement birthdays together, decided to compared investment accounts (as a competitive twin is wont to do) on their 65th birthday. What they discovered was shocking.
The son won the ‘battle of the accounts’ – he had ~ $975,000 in his account to her $950,000. But it took him investing $80,000 over nearly 40 years to his sister’s $14,000 of investment over a 7 year period. The sister let him celebrate his somewhat pyrrhic ‘victory’, knowing full well that she was truly the wiser of the two having utilized early in life the power of compounding.