“I started Investing at the age of 11 and regret not starting earlier” - Warren Buffett
While this Quote exemplifies the humor of Buffett, there are two important lessons to be learnt here which are fundamental in any Investing : Learning & Power of Compounding.
Warren made his first investment at the age of 11 on three shares in a Company at a price of $38 each. But,soon the price fell down to $27. He was shocked. Fortunately, the stock price of the company rose again to $40.He immediately sold it and gained a net profit of 5 dollars and felt greatly relieved.The particular stock went on to reach $200 per share. He had learnt his first lesson that “If an investment gives good value, one should not sell it irrespective of its price.” This lesson that he learnt while trading with 3 shares helped him to stay calm when he went on to invest in more than 30 million shares. Another hidden lesson is that, It pays to start early in the Investments. Even if we falter initially, there would be a lot of time still available to recover, learn and grow.
The second lesson is the early you start the larger the effect of Compound Interest. Buffett’s riches are partly attributed to the fact that he stayed invested over the long-term that gave him the advantage of compounding effect. On the other hand, People who indulge in “trading” ,although they may earn high short-term returns rarely sustain over the long-term and hence lose out on the compounding effect.A simple thumb rule of Compounding is the Rule of 72: For interest rates less than 50% ,to find how long it takes for money to double, simply divide 72 by the Rate of interest. For example, it takes 6 years for your money to double assuming 12% rate of interest (72 divided by 12). More than the math involved, everyone should understand the power of compounding. It has a Snowball effect. Its rewards are handsome when you start early and stay longer in the Game.
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