Investment Compounding: To the upside and to the downside!

Flogging the "compounding" horse.

I've been ranting about this topic for a while and thought I would provide some numbers for why it makes sense.

Assuming you can find a wonderful company that doubles in value every X number of years. If you can do that in 10 years, your rate of return is 7.2%. Too low in my opinion. Trying to double every year is too aggressive and would probably lead you to making very risky decisions.

What I aim for is doubling every 3 years, or a compound annual return of 26%. If I slip, I may do it in 5 years, still not bad.

Back to the topic of holding winners. Let's say that your investment has double a few times and you are now up 50x your initial investment. Do you know that at the NEXT double, you are now up 100X from your initial investment?

This is why, once you find a WONDERFUL company, be very careful about getting off the horse too early.

Now, let's flip the discussion. 

Question: "How does a stock fall by 95%?"

We've talked about the beauty of finding compounders and holding on. This is akin to "holding the winners".

Do you know what the flip side is?

I read the question above somewhere many years (literally decades) ago. The answer? It falls by 90%, and then HALVES.

Pause and think about it. Many people would have thought that after falling by 90%, surely the bottom is in sight and how much lower can it go right? Well, you might still lose 50% or maybe more of your initial investment!

This highlights the danger of trying to catch falling knives, or buying average companies in the hope that they will rebound some day.

My preference? Sticking to WONDERFUL companies.