THE BLOG

The Power Of Compound Growth

17/04/2014 13:12 BST | Updated 17/06/2014 10:59 BST

$37 million a day. That is, on average, how much Warren Buffet made a day last year. A DAY! Such a vast amount like this beggars belief. Most people today would be happy to earn 1% of that in year. The question then has to be asked is how did Mr. Buffet generate this amount of money? The answer lies in moving away from what you understand as "the normal" way of earning money and in return embracing one of the most powerful words in the investing and trading world - compounding.

Einstein said "Compounding is the 8th wonder of the world. He who understands it, earns it .... he who doesn't .... pays it". If you have been in trouble with a credit card then you would know what I mean. Investors, like Warren Buffet, and lesser-known, but hugely wealthy traders, like John W. Henry, have all learned to make compounding work for them with jaw-dropping results.

Let's take a trip down memory lane and cast your mind back to your childhood. From a young age, I am sure you will recall, we had it ingrained in us that if we work HARD we will be successful. That, does indeed, have an element of truth to it. Many a success story have been built on sacrifice and dedication but when it comes to generating large amounts of money, you need a paradigm shift in your ethos. You need to change your thought process from working hard to working SMART. You need to break the conditioning of believing that money is earned from working a 9 to 5 (or longer!) with the end product of a monthly pay cheque. The harder you work, the better you get at your job, the more you get paid. And so it remains for the next 40 years. But there is another way, a far more powerful and potentially more lucrative way.

Successful investors and traders have learned to turn this process on its head. By mastering the ability to see exponential returns through the power of compound growth, money now works for them.

So what is compounding and how does it work?

Let's imagine you invest £10 000 in stocks in Google and that returns you 20% at the end of the first year, giving you a nice total sum of £12 000. However, instead of cashing in and walking away with the £2000 profit you have made, you hold the Stock for another year and see another 20% return. Instead of seeing another £2000 profit, you see a 20% return on £12 000, giving you £2400 and so now a total of £14 400. If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide exponential returns.

Now let's take it a step forward and imagine at strategic intervals throughout the year, you start buying another 20% worth of Google stocks which all go on to generate exponential profits in the same way as mentioned above. This is how those huge financial gains are made. Holding onto a single investment in a company will generate you a decent return but knowing how and when to buy multiple investments across multiple stocks is "the secret" to making your money work for you.

There is no doubt that compound growth can make you very rich, but it takes time. Of his $60 billion net worth, $59.7 billion of Warren Buffet's personal wealth was added after his 50th birthday and $57 billion came after his 60th birthday. Time is a huge factor in Mr. Buffet's success.

With the advent of the internet, access to the money markets has now changed and is open to us all with the opportunity of making money from home but crucially, the way of generating consistent returns has remained the same. However, in part to do with the way companies are allowed to advertise within the industry and in part, people's failure to appreciate the time and investment needed to make a career in trading, the majority fail with disastrous results. Those who understand the profits that can be made adopt an in and out approach, hoping to see riches quick. Large risks on quick moves may bring a quick profit but there is no longevity. In addition, it is a stressful style of trading and also time consuming, requiring large amounts of time in front of the computer a day.

If you have decided you have what it takes to be a successful trader, then you are opening yourself up to a new lifestyle. One where you are in control of your finances and time. However, once you have done your research and analysis and before risking your hard-earned money on a chosen stock or currency, stop and ask yourself "What would Warren Buffet do?"