I always raise a question to my friend and ask for their opinion that if they had RM1,000 and invest this amount into a subject company which rewards them a return of 34% annually. Moreover, the 34% return that they earn from the company would be retained to further reinvest into the company for further business expansion. After 40 years, the investment value of the company will be how much? Some of my friends answered the investment could be around RM100,000, some even said it could be RM10,000,000.
The actual answer is far more than RM1 mil. Maybe we should use a calculator or mathematic formula to value the investment amount as stated below:-
Investment Amount After 40 Years = RM1,000 * (1+0.34)^40 = RM121,392,522.10
By investing RM1,000 for 40 years, we will be rewarded roughly 120,000 times of return! Put it into another way to say that RM10 will become RM120,000 after 40 years! This is how Warren Buffet becomes 1 of the most richest man in the world.
Warren Buffet acquired the holding company Berkshire Hathaway at an average share price of USD12 at year 1964 (till 1966) and grow the share price to a peak USD$150,000 at 2007 (around 41 years). So what is his annual compounded rate of return within this 41 years? Just use a mathematic formula to count then we should get:
Annual Compounded Rate of Return = {[USD150,000 / USD12]^(1/41)} – 1 = 25.87%
With a world class rate of return around 26%, Warren Buffet becomes a gozilionaire within 41 years. No wonder even Elbert Aeistain is quoted as saying "The most powerful force in the universe is compound interest."
I would like to further point out that compounding effect does not care much about how many the initial amount put in. Indeed, that is all it takes 2 basic elements, i.e. sustainability of the rate of return and time.
(To be continued)
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