The Magic of Compounding-Part I

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These would be the same methods utilized by warren buffett to produce the world's greatest trading mozaik fortune. Read it, study it, MASTER it.

Some of you learn about this, some of you do not. In either case I am likely to provide you with the basics of compounding, along with a handful of new slants on the idea. It is best to browse The Magic of Compounding not only once, but many times. When you yourself have children, print this write-up, and give it for them to see. If they grasp this notion they will become rich.

The Fundamentals

Compounding describes how figures, or money, can grow. Numbers can grow within an arithmetic progression, for instance 2,4,6,8,10,12 or 3,6,9,12,15,18, where one product is added on at each part of the progression and that action offers the growth, or, numbers can grow exponentially, 2,4,8,16,32,64. Within an exponential progression the increase comes by doubling the number at each part of the progression. Begin to see the huge difference? This really is compounding.

Now the really remarkable component, the magic, comes whenever you observe how fast compounding advertiser can make money grow. And you know what! That is right, I have got a game to play with you, a little story to tell, which will illustrate this rule. This puzzle is really as old as J.P. Morgan's moustache comb, so if you have been already trained in compounding you have heard it before. But did not I let you know to see this section many times? OK, then, solve the puzzle with us once again while I tell it for the very first time to the kids for whom "The Magic of Compounding" has just been printed out.

The Problem

I am a wealthy and generous man, and I wish to hire you to work for me for 30 days. Since I am also flexible, I give you a choice: you can decide to be paid the entire month's salary up front on the first day of your work, or, I will pay you 1 cent the first day. Next I will double your pay every day for the rest of the month, but you will not get the money until the last day of the month. Etc the very first day you'll work 8 total hours, and you'll have 1 penny visiting you. But on the 2nd day you'll generate 2 cents. Hang on, it gets better. On the next you will have gained 4 cents, your day after that 8 cents and so on. Saturdays and Sundays are included simply to give you a better chance. Oh, incidentally, if you take your pay all at one time on the very first day I will give you a million bucks ($1,000,000.00) cash. Seems like an easy choice, does not it?

Well, you decide for yourself. Now let us look at how much the fellows who picked the penny-a-day plan are going to have at month's end. Remember, on the one hand $1,000,000.00. On the other hand you get a penny the first day, two cents on the second day, 4 cents on the 3rd day, and 16 cents on the 5thday. If you keep working the numbers by the 15th day, you are up to $163.84. By the 18th day, you have cracked the $1,000 dollar mark coming in with $1310.72.

At this point you have to start thinking to yourself that it has taken 18 days, and I am only at $1300 and change. Was I better off taking the million dollars like the other day offered and taking a million dollar lump sum payment? Maybe you were lets see what happens. Keep in mind, we are continuing to double our money every day and we have 12 days to go.

On the 20th day, you are up to $5,242.88. Your numbers quickly move up from here on successive days:

Day 21 $10,485.76

Day 22 $20,971.52

Day 23 $41,943.04

Day 24 $83,886.08

Day 25 $167,772.16

Day 26 $335,544.32

By the way, did any of you ask me what month of the year we are in? Is it February with 28 days, or leap year with 29 days, or September with 30 days, or December with 31 days? You should realize that it is likely to make a difference. Do you want the million dollars? Ask your kids again which they would choose?

Day 27 $671,088.64

Day 28 $1,342,177.28

Day 29 $2,684,354.56

Day 30 $5,368,254.56

Day 31 $10,737,418.24

If you work for me in September with 30 days you make over $5,000,000. In December it is over $10,000,000!

I have never met the child who did not leap at the $1,000,000 on day one. This is because the human mind thinks arithmetically, not exponentially. You might say that we are hardwired to think in this linear fashion. The software in our brains compels us to think about progressions as being simple arithmetic ones. Luckily though, how we think about things, our prejudices, our attitudes, and our mindsets, can all be changed and worked with. We can update the software! We can consciously change the way we think about numbers, money and investing by absorbing new information, namely, that when you make your money compound you can get rich sooner rather than later.

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Regards,

Richard C. Stoyeck