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Compounding benefits
Please remember that the value of investments and any income from them can fall and you may not get back the amount invested . Past performance is not a guide to future returns .
Early in his career , Warren Buffett bought shares in the failing textile company Berkshire Hathaway . In 1965 he raised his stake to take control , later transforming it into a legendary investment conglomerate . So why does he now call Berkshire Hathaway “ the dumbest stock I ever bought ”? The answer lies in ‘ compounding ’. In 2010 , the Sage of Omaha said pouring money into turning around the Rhode Island firm was a huge mistake . What he should have done , he suggested , was put the sum into a steady-growth insurance company . And left it there .
Thanks to the wonder of compound interest , he would have been about $ 200bn richer 45 years later . To appreciate why , you need to understand how compounding produces exponential returns . It works because you not only earn interest on your original investment , but also on additional returns . Buffett compares it to a snowball going down a slope . The further it travels , the faster it gains size . The Scottish American Investment Company ( SAINTS ) is also a big believer in the value of compounding . Our job is to get better at spotting the companies that can deliver it . Take Watsco , the Miami-based air conditioning distributor . Over the past decade , it has grown its profits at a compound annual growth rate of 12 per cent . It ’ s never made a loss . As a relatively small player , it still has the ability to take a big bite of the US ’ s $ 17bn air conditioning market . After honing its business model in hot and humid Florida , Watsco continues to grow across the US . It ’ s easy to see it enjoying another decade of 10 per cent compound annual growth .
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