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Compounding starts after year ten
Compounding at scale
Danaher shows what the late years look like. It has annualized at over 21 percent for four decades, an 1,800 times multiple on invested capital. At that size, doubling the stock price would put it at 3,600 times, and the compounding at this stage is crazy.
Why timelines matter
That timeline shapes what gets backed. A three-to-five-year effort can produce a very good return and still not be worth starting, because afterward everything has to begin again for another okay return. The payoff arrives after year ten, when a 10 times outcome has a chance of migrating toward 100 times, and that takes people with the talent, the learning agility, and the desire to give it 20 to 30 years.
Short cycles
Short cycles get in the way. Hedge funds are marked to market every day, and private equity and venture capital run on three-to-five-year cadences, which makes it hard to build anything lasting. Compounding that goes untaxed over 40 years is what Mitch Rales calls the eighth wonder of the world.
Why does compounding feel slow at first?
Growth at a steady rate adds a fixed percentage each year, so the dollar gain depends on how big the base has already become. In early years the base is small and the gains look modest. Later the same percentage is applied to a much larger number, so most of the final total arrives in the last stretch. The curve is called exponential growth, and its shape is the same at any rate.
Why is Einstein credited with the eighth wonder line?
The line is widely attributed to Albert Einstein. Researchers who trace the origins of quotations, including Garson O'Toole of Quote Investigator, have not found evidence that he said it. Mathematical problems on Babylonian clay tablets from roughly 2000 BCE already involve compound interest.
How does untaxed compounding differ from taxed?
When gains are taxed every year, the tax comes out of the base that would have grown the following year. Deferring tax lets the full amount keep earning returns, so the gap between the two paths widens each year. In the United States, gains on a stock that has not been sold are not taxed until the sale, while interest and dividends are taxed as they are received.
Why are hedge funds marked to market daily?
Marking to market means valuing holdings at current market prices instead of their purchase price. Hedge funds hold securities that trade every day, so prices are available to calculate net asset values. Investors in many funds buy and redeem shares based on those values, which makes regular accurate pricing necessary. The Financial Accounting Standards Board issued its fair value standard, Statement 157, in 2006.
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