Warren Buffet's Secret - The Power of Compounding

Understanding both the power of compound return and the difficulty of getting it is the heart and soul of understanding a lot of things – Charlie Munger

Compounding is one of the wonders of the world and Warren Buffet has used it to dramatic effect in getting the value of his investments to grow at spectacular rates. It is probably his greatest secret and the one that eludes the majority of students of Buffettelogy.

Warrant believes that compounding is the secret to getting really rich. Here’s how compounding can make you rich. Shown below is what 100,0000 would be worth in ten, twenty, and thirty years if allowed to compound tax-free at an annual rate of 10,15,20%.

The difference that just a few percentage points can make over a long period of time is astonishing. Your 100,000 compounding at an annual rate of return of 15% a year for 30 years will grow to 6,621,177.

Go from 15% to 20% and you will find that 1,00,000 will grow to 2,37,37,631 - Yes! 23 Million. It’s amazing, isn’t it? A difference of just 5 to 10 percentage points can have a tremendous effect on your total gains.

The point is very simple. Over longer time frames, the impact of compounding gets more visible. And that is why investment experts say "Invest for the long term".

Historical Sensex Returns Updated - 2024

Historically Sensex has given returns of about 15% per year, despite volatility and price fluctuations of about -20% to +60%. The following table shows S&P BSE Sensex historical data - start & close values and the yearly returns of the sensex from 2000 to 2024. So far during the year the index has hit an all-time high of 75,124 and despite markets hitting all time highs not all stocks make all-time highs. There are many stocks still below their highs. Stocks like HDFC Bank, ITC, Asian paints are still well below their highs and some of them have given low returns over last 3-5 years. Individual or Retail investors can achieve consistent returns through investing via mutual funds , whether it be active or passive. Chasing returns from individual stocks is futile. Be a wise investor !

Tracking Difference in ETFs and Index Funds

As we all know, an index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Nifty 50 Index. Tracking difference is the discrepancy between Index Fund/ ETF performance and index performance. Below is the ETFs and Index funds with high tracking error. The above tracking error is since inception. ETFs and Index funds are considered to be low cost, but in here in India, the tracking difference are quite high and add to that expense ratio, the total works out to over 1-3% and higher in certain cases. These ETFs and Index funds are no longer low-cost as one would expect them to be.

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