As this is my first actual post ( My SlideShare papers are here ), I would like to welcome you to this website. In the coming years, I hope to share useful information that could be on any topic I find interesting, but most will be related to value investing or the many disciplines related to it. Any information I provide should be viewed as either my opinion or a description of how I do/would do things. In no way am I giving advice (please see the disclaimer); some who read this may think I am crazy and perhaps should move on (ADD LINK FOR DISNEY HERE).

I have been interested in investing and value investing for a long time. Unfortunately, my career was in engineering (electronics and computer science) so I never had formal training in finance when I was in college. I also did many dumb things over the years and will share some of that along the way (i.e. taking advice from a stockbroker, buying/selling options, speculating on commodities, buying stocks because several newsletters liked them, owning stocks in companies that went bankrupt or suffered precipitous declines in share price, etc.).

Along the way I started seeking better sources of information and started questioning what I knew and my approach. As one of my value investing professors stated my trajectory to value investing as with others was “through trauma”.

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In The Snowball by Alice Schroeder we learn that the concept of compounding struck Warren Buffett as critically important at a young age.

“The way that numbers exploded as they grew at a constant rate over time was how a small sum could turn into a fortune. He could picture the numbers compounding as vividly as the way a snowball grew when he rolled it across the lawn. Warren began to think about time in a different way. Compounding married the present to the future. If a dollar today was going to be worth ten some years from now, then in his mind the two were the same.” – Alice Schroeder

“But since Warren looked at every dollar as ten dollars someday, he wasn’t going to hand over a dollar more than he needed to spend. Every penny was another snowflake for his snowball.” – Alice Schroeder

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The concept of compounding has been around for centuries. For example, the Rule of 72 has been around for more than five centuries (first known discussion I could find was in Luca Pacioli’s Summa de Arithmetica, Geometria, Proportioni et Proportionalita published in 1494).

In modern times many people have claimed Albert Einstein said something like ‘compound interest is the eighth wonder of the world’, but I was unable to confirm that Einstein actually said it and this Wall Street Journal article suggests he did not ( The Genius Behind Accounting Shortcut? It Wasn’t Einstein ). It seems like the phrase was attributed to Einstein because he was a genius. Some of the people who made use of this claim had good intentions (educational and motivational speakers) and others may not have (sales and marketing people exploiting information asymmetry). Caveat Emptor!

Value Investor Mohnish Pabria presented a short video ~20 minutes into an educational Google Talks presentation he gave July 21st, 2014 ( Mohnish Pabrai: “Dhandho. Heads I win; Tails I don’t lose much” | Talks at Google ). The video demonstrates the effect of doubling quantities multiple times using a chess board story.  One thing Pabrai talks about after that video is how doubling your money every three years at a rate of 26% would allow you to turn $10 thousand into $10 million in three decades (meaning multiplying your money by 1,000). This does however require the ability to compound at 26% which very few can do consistently.

“the essence of the genius of Buffett and Munger is they absolutely understand the power of compounding” – Mohnish Pabrai

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Let’s look at how to use the Rule of 72 to do this.  Basically if you divide 72 by the rate of return for an investment (i.e. the interest rate for a bond), the result will tell you approximately how many compounding periods (i.e. years) it will take to double your money.

EXAMPLE: Say an investment earns 7.2% per year. 72/7.2 = 10 years to double the investment

I punched these numbers into my Texas Instruments BA II PLUS financial calculator and got 9.97 years, which is the actual answer (so you can see the rule is a good approximation in some cases).

Rearranging Rule of 72 we can say the required rate of return = 72 / number of compounding periods or 72/3 = 24, so a return of 24% should allow you to double your money every three years. This turns out not to be as accurate: using a financial calculator (I/Y = 24%, N=3) indicates the money will only be x1.91 and not doubled (x2). The financial calculator indicates a return of 25.99% would be required (this is in agreement with the 26% suggested by Pabrai).

Now, dividing 30 years by 3 years gives us the opportunity to double our money 10 times in three decades (30 years). A quick way to calculate this is to raise 2 (2 is from the doubling) to the tenth power which is a function available on both financial and scientific calculators (physical or software).
2^10 = 2 x 2 x 2 x 2 x 2 x 2 x 2 x 2 x 2 x 2 = 1,024
$10 thousand x 1,024 = $10.24 million
Using a financial calculator (I/Y = 26%, N=30) results in $10.259 million (pretty close suggesting one should not use the rule of 72 for more than a few doublings since the error also compounds).

If I accomplish anything with this post, I hope you are able to see the keys to creating wealth stem from three things:
• Time (more time = more compounding periods)
• Rate of return (higher is better and I believe true value investing is able to to provide a higher rate)
• Ability to set aside some of one’s income sooner than later so one can start the process (this requires acknowledging the importance of doing so and exercising self-control/mastery).