Let’s
imagine that a hotshot trader makes 200% returns every year on his
$500,000 account, which would be wild success to say the least. The only
caveat is that he has to take his profit out every year because the
trades can’t scale up any further. He would make $1 million per year —
good money if you can find it. After 30 years he would have $30 million
in total profits.
Now let’s imagine we invested
that money with Warren Buffett instead. Say that instead of 200% he can
make 20%, but he can scale indefinitely. That first year, a $500,000
account would kick off $100,000, not much compared to the hotshot
trader’s payday. But after 30 years we wouldn’t have $30 million. Thanks
to compound interest, we would have $100 million. And where the hotshot
trader would have $50 million after 50 years, we would have $3.8
billion!
That’s the magic of compound interest.
And that’s what makes Warren Buffett’s success so incredible: 20% that
can scale beats 200% that can’t scale every time.
-- John Roberson, Quora
