Albert Einstein: the most powerful weapon in the world is not the atomic bomb, but "time + compound interest".

Since you have spare money, what are you most afraid of? He is afraid of being stolen and robbed, and even more afraid of the devaluation of his hard-earned money. As a value investor, most people should understand the concept of "compound interest effect". Compound interest corresponds to "time leverage", and time has become the most important element in investment.

Investing is like a long-distance race. What matters is not your speed, but whether you can reach the finish line at the right speed. But unlike long-distance running, investment is a long-distance run with no end. The farther you run, the more you can get a rich "gift". Therefore, to beat inflation has become the only way for us to keep our money.

What is compound interest?

More than 390 years ago (September 11, 1626), Peter Minuit, one of the first generation of white immigrants, came to America and bought Manhattan Island in New York from native Indians with trinkets equivalent to 24 dollars. the value of this land in New York can be estimated at more than 100 billion in terms of tax revenue.

In this way, it seemed to be a very unfair deal for the Indians at that time. In this "deed", the Indians obviously suffered from the immediate interests, and for many years, the Indians once seemed to be the object of cynicism and a case of negative education.

However, there is one method of calculation that can produce unexpected results.If the Indians at that time had invested this $24 and lasted for more than 390 years, how much wealth would they have today?

Buffett likens investment to snowball, saying that what investors need to do is to find a piece of wet snow (looking for investment products that can get higher compound interest) and a slope long enough (to be able to obtain compound interest for a long time). Will be able to roll out a huge snowball (get a huge return on investment). He has always used the method of using low-cost insurance capital to invest in a product for a long time, and finally get a huge return through the compound interest of time.

Buffett acquired 90% of his wealth after the age of 60. Investment guru Warren Buffett's Berkshire investment company has a geometric average return on market capitalization of 20.8%. It took him 52 years to turn one dollar into 19727 yuan. Peter Lynch's return on investment is comparable to his. The geometric average yield is an astonishing multiple of output every 10 years.

We don't have to ask the Indians to reach Buffett's level of return on investment, but we can also look at the power of compound interest.

Some good people have calculated that if the annual income of $24 more than 390 years ago had been 8%, it would have become an astonishing income of about $121 trillion now. I don't know how many New York I can buy. This is the charm of time compound interest.

Compound interest is a friend of time.

The focus of Buffett's preference for long-term fixed value investment is also the long-term compound interest effect of time. Principal, time and interest rate are the three elements of compound interest. The first two items can be provided by investors, and the job of asset managers is to achieve a high and stable rate of return over a long period of time.

Many people manage their finances well, not because they have chosen profitable investment instruments, but because they have made use of some sound investment channels to do so step by step, but the important thing is that they start a few steps earlier than others.

From an investment point of view, the return on investment calculated in terms of compound interest is quite amazing, and many people know the formula for calculating compound interest:Principal-interest sum = principal × (1 + interest rate) period. As for the concept of compound interest, it is easiest to understand it by what is commonly known as "rolling interest". In other words, add the interest or profits earned from the use of money to the principal and continue to earn remuneration.

For example:

Suppose an investment has a profit of 10% every year. If it is calculated on the basis of simple interest, an investment of 1 million yuan can earn 100000 yuan a year, and it can earn 1 million yuan in ten years, double that.

However, in terms of compound interest, although the annual interest rate is 10%, the "amount" actually earned each year will continue to increase. In the case of the 1 million yuan investment mentioned above, it will earn 100000 yuan in the first year, but 10% of 1.1 million yuan in the second year, that is, 110000 yuan in the second year, 121000 yuan in the third year, and nearly 1.6 million yuan in the tenth year, an increase of 1.6 times.

There is also a "72 rule" that can help us easily figure out how long it will take to double the principal.

As shown in the picture above, for example, you have a principal of 100000 yuan. If you invest in a product with an annualized return of 10%, you will have $200000 in hand after 7. 2 years. In the same way, if you invest 15% of the annualized income products, 100000 will become 200000 in only 4.8 years.

If we look at it the other way around, for example, if we have a sum of money, we hope to double the principal in five years and ten years' time. So divide 72 by the time period, and you can figure out how much we need to invest in wealth management products with annualized returns.

For every ordinary person, we live in a "three-dimensional world". From two dimensions to three dimensions, it is a huge perspective to open. Two-dimensional ants always climb on the plane and do not know the outside world they are in. It is time that restricts human beings from crossing from the "three-dimensional world" to the higher dimensions. This is also mentioned in Interstellar, once human beings have solved the function of time, they can enter a broader world.

Being a friend of time can help a value investor to maximize the growth of his assets. The time function is far more important than the speed function. We see that the greatest investors in history, whether Buffett, Brocker, or the Rockefeller and Morgan families, have enjoyed a long period of compound interest. The greatest speculator in history, Livemore, who was once the richest man in the world, committed suicide because he could not enjoy the compound interest of time. Left the immortal memoir of the stock giant over there.

There is an article recently: "compound time" is more powerful than "compound interest"! The core idea of this article is to enjoy the compound interest of time. To do things that have time for compound interest. You will find that the longer you get, the more value you will gain. Whether they are great investors, entrepreneurs or even scientists, they all spend their time on things that have the effect of compound interest, rather than trivial daily work. The better the person is, the less busy he is.

But the enemy of compound interest is mean regression.

But the biggest enemy of time compound interest is the mean return! How many people still remember that China's first generation of self-employed, "fool Guazi" has been around for a long time? As the earliest Chinese millionaire, he has long been overwhelmed by the tide of the times. In the Chinese stock market in 1994, there was a man nicknamed "green preserved egg" who was worth 30 million yuan. This man, whose real name is Yang Weiguo, quickly became rich by entering the stock market and buying and selling stocks.

It was 30 million in 1994, which is about 3 billion of today's worth. However, he soon lost all 30 million yuan in treasury bond futures. Even the once active "Yang million" has not achieved much since. Even some entrepreneurs, after the tide receded, gradually withdrew from everyone's field of vision.

The problem here is: mean regression. If a person cannot evolve, it is impossible for him to maintain a non-linear growth rate. His level of wealth will eventually return to its rightful place. This is the difficulty behind "time compound interest". It doesn't seem difficult, but in fact, keeping growth above the social average for a long time means that you have to evolve yourself.

Keep evolution in order to really enjoy compound interest.

Dario said that evolution is the lesson for all of us. I have come to understand that behind compound interest is the theory of evolution of time. If you want to be a friend of time, you must allow yourself to evolve. This evolution includes the evolution of knowledge, the evolution of way of thinking and the evolution of personality. In the "selfish genes", each of us is born "misled" by our own genes.

Why do you say "misleading"? Because, from a genetic point of view, he has only one purpose: survival and reproduction. However, earth-shaking changes have taken place in today's society and the primitive society ten thousand years ago. Many of the "genetic" patterns we have left behind are aging. This is what we need to do when we live in this world today, to correct our internal genes and to be truly happy.

Evolution means looking at yourself and the world objectively, long-term self-drive, and overcoming genetic weaknesses. Evolution is difficult, but only when you evolve can you really be on the side of time. Otherwise, we will not become friends of time, we will be returned by the mean for a long time. That's why, when investing in this world, there are many meteors and few stars. It's too hard to keep evolving for a long time.

Therefore, many people think that compound interest is just sitting there, but it is not.

The revelation of compound interest

We need to invest.The rate of return is too low, which will greatly affect the effect of compound interest, so keeping a relatively high rate of return is the key. What should I do? We need to invest. Only by investing, can there be a higher rate of return.

Invest as soon as possible.The longer the time, the greater the effect of compound interest. If we want to take advantage of this effect, we should invest as soon as possible, and the sooner the better. The right thing to do is that if there are conditions, there should be a plan for investment and financial management after there is a wage income.

To maintain a sustained and stable rate of return.The principle of compound interest tells us that if we maintain a low or high annual rate of return, over time, we will be able to invest and get rich. How much is the right rate of return? Generally speaking, it is ideal to set the goal at 15%. According to the market situation, this goal can be adjusted accordingly. With the efforts of individual investors, this goal can be achieved.

Big losses should be prevented.The return of compound interest has a magical effect only by continuous calculation. During this period, if the income is flat for a year or two, it does not matter, you are afraid of serious losses. If there is a serious loss, not only the previous efforts will be wasted, but also the effect of compound interest will come to an abrupt end, and everything will have to start from scratch. If you want to use the principle of compound interest to get rich, you must bear in mind that there must be no big losses.

Compound interest is to maintain evolution and improve yourself. In terms of our goal, people who want compound interest in essence still want to get more things. So Munger said, "if you want something, you'd better make yourself worthy of him!" "only by constantly improving yourself can you get more. Even if many people look back and say, you see, stocks like Maotai, Tencent and Amazon.Com Inc have brought huge returns to the holders for a long time, have I been enjoying the compound interest on the investment without moving?

However, in fact, these enterprises can go through the cycle for a long time because they are evolving themselves, and the investors who can hold for a long time are also evolving their own cognition to match the speed of enterprise evolution. Otherwise, after breaking through your perception, you will still fall into the bag at some stage.

Lifelong learning, keep evolution, let our evolution and time match, this will bring compound interest return to our own investment, and even life!