Compounding Explained

The process by which investment returns generate their own returns over time, creating exponential growth. Described by Einstein as the eighth wonder of the world.

What It Means for Investors

The Basic Concept

If you invest $100 and earn 10% per year:

Year	Balance
0	$100
1	$110
5	$161
10	$259
20	$672
30	$1,745
40	$4,526

Notice: Year 30 to Year 40 adds more than the first 30 years combined. Compounding accelerates over time.

Why Compounding Matters in Investing

The 10-Year Difference

Starting at age 25 vs. 35 to retire at 65:

Start Age	Years Compounding	Final Amount (from $10,000)
25	40 years @ 10%	$452,593
35	30 years @ 10%	$174,494

The 10-year head start doubles the outcome.

Buffett's Compounding Edge

Buffett has achieved ~20% annual compounding for 60+ years. This means:

$1,000 invested in 1950 ≈ $330 million today
His berkshire-hathaway ha

Key Takeaway