The Magic of Compounding

Buffett always keep mentioning this at shareholder meetings and university talks.
Rule No.1 Don't lose money .
Rule No.2 Don't forget Rule No.1

In other words, Buffett is saying that the preservation of capital is necessary to make compounding work to your benefit.For example, traders are known to make huge profts and losses by frequently jumping in and out of stock positions.However, if one considers the daily losses and stock transaction fees,this makes even more unlikely that one can beat the stock market consistently over time.Traders who can do so are few and far.Only a handful have made it in the dog-eat-dog world of stock trading.

The Sequoia Fund run by the late Bill Ruane and now current managed by Bob Goldfarb is one of the best examples on the magic of compounding.Employing the time tested concepts of value investing, $10 000 investment would be compounded at a annualized return of 15.68 over 36 years, turning that investment into $2 024 960.Now that's magic!

Value investing is a powerful tool in the road to wealth creation.One should not confuse this approach with day trading or other popular investment strategies.For some, value investing is seen as risky and illogical.Its true to say that value investing is not entirely easy as one has to continually make contrarian decisions against the psychology of markets.Nevertheless, its a very powerful tool.