The Beauty of Compounding

Slow versus Fast – The Beauty of Compounding

In 1998, a very successful stockbroker in Malaysia wants to change the way he lived completely. He quit his job, sold his house and other worldly possessions and go walkabout. 

Before he departed on his odyssey, he had the problem of what to do with the proceeds resulting from selling everything he owned. In the end, he bought a good pair of walking boots, a rucksack, a change of underwear and a one-way ticket to Australia. The balance, which amounted to a seven-figure sum, he invested in several reputable domestic and regional unit trusts. 

He started off as a jackaroo in a sheep station in deepest darkest Queensland, then trekked across the Indonesian archipelago and claims to have sighted the Yeti in Nepal before he returned to KL in June 2002.

During this period, he never looked at a Bloomberg screen, read financial section of a newspaper or came in contact with anyone with the remotest knowledge or interest in financial markets.

In his four years of walkabout, the KLCI rose an impressive 270% during his absence, but the net value of his unit trusts rose by a factor of 412%. He hasn’t cashed them in and today they are up a net 524%. If he had been following his investments regularly, he probably would have liquidated 500% ago. Instead, he has saved himself a lot of stress and made a lot of money simply by having faith in the undoubted long-term structural growth trend (with a few hiccups here and there) we are enjoying in Malaysia and Asia in general.

The unit trusts in which he invested were able to outperform a strong market due to luck, judicious stock picking from skilled fund managers and very importantly, reinvestment of dividends.

Reinvestment of dividends demonstrates what is commonly known as “the beauty of compounding”: if you have a share in a company which pays out a regular dividend, and you use the dividend to buy more of the same shares, your assets will grow exponentially.

The benefit of the beauty of compounding can also be derived from “Dollar Cost Averaging” when you systematically (Systematic Investment Plan) and regularly invest a fixed amount of money, irrespective of price at the time of investment is made.

The below image illustrates the effect of compounding interest of 2 investors who started the SIP on different timing. This implied the cost of procrastination for the investor who started the SIP 10 years late was simply huge.  

This story published in local newspaper written by a MD of an asset management company and he wanted to share with investors.