# Compounding



## obiwan (1 January 2005)

in 1998, I visited a board called hotcopper. I guess things don't change much. This site looks slightly more sensible. 

I am amazed that people still expect 10-20% pa real returns on a consistent basis and 50% or such on a leveraged basis. This is a warren buffet type achievement : extremely unlikely year on year. At 20%pa a mere $1000 grows to 9.1 million in 50 years. At 50% $1000 becomes 638 billion (in todays dollars this is 10% of the M4 in the US) in 50 years. No one that I am aware of has been able to do this. It is obvious that high returns over decades are extraordinarily difficult to achieve. There is only a finite amount of real wealth on our planet, and if everyone grew their investments at these speeds soon all the wealth in the world would be insufficient to sustain the returns. Economies, markets and I suspect trading accounts experience k-waves that self correct the system. 

I suppose the hope is that you can build up your trading capital through these big gains initially and then preserve it. Unfortunately by doing this you drastically increase your chances of blowing out. And even if you are lucky enough to accumulate enough trading capital you will almost certainly blow out at some stage. Faster is often slower, and perhaps a portfolio aiming at a real return of 5% (or 1 % above the historical mean) is more realistic, likely to be more structually stable over short and long time periods and have a much higher probability of success.  

A decade I read a book called the richest man in babylon, it is still one of the best books I have read. Compounding is something that few people understand.


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## wayneL (1 January 2005)

obiwan said:
			
		

> in 1998, I visited a board called hotcopper. I guess things don't change much. This site looks slightly more sensible.
> 
> I am amazed that people still expect 10-20% pa real returns on a consistent basis and 50% or such on a leveraged basis. This is a warren buffet type achievement : extremely unlikely year on year. At 20%pa a mere $1000 grows to 9.1 million in 50 years. At 50% $1000 becomes 638 billion (in todays dollars this is 10% of the M4 in the US) in 50 years. No one that I am aware of has been able to do this. It is obvious that high returns over decades are extraordinarily difficult to achieve. There is only a finite amount of real wealth on our planet, and if everyone grew their investments at these speeds soon all the wealth in the world would be insufficient to sustain the returns. Economies, markets and I suspect trading accounts experience k-waves that self correct the system.
> 
> ...




It depends on your capital base Obi.

50% return on 100-500k is achievable. But as an investor approaches Buffetesque proportions, it becomes less possible.

Also most traders remove a proportion of their profits for living expenses, lessening the compounding effect of these returns. 

Of course many traders do blow up, but not the ones with the best risk management practices (eg the Dennis v Eckhart example)

I personally have a maximum amount of capital that I trade with, and the rest gets "invested" in buy hold. You'll find that many long term traders do likewise.


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## clowboy (1 January 2005)

It's all cyclic.

I dont know very many people that would simply sit on those kind of returns year in year out.

I certainly wouldnt let my $1000 sit for 50 years watching it grow to 9.1 million (1.8 million (inflation adjusted)) maintaining my current lifestyle.

The number one reason people invest is so that they can spend more money.


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## stefan (5 January 2005)

> The number one reason people invest is so that they can spend more money.



Interesting statement. I would say it's the number one reason why people fail. I don't want to sound like an old wise guru, but I've come to the conclusion that the secret of a sustainable future is to live BELOW your average income. For whatever reason most people don't share this view as they keep spending like there's no tomorow. Properties are so heavily loaned against these days, it would scare the **** out of me to live like that. Knowing that my boat, holiday and fancy car can only be sustained if house prices don't drop doesn't really sound like much freedom and joy at all.

I still think we will see some interesting corrections in peoples "wealth" within the next 2 years. There are way too many "millionaires" out there right now.

Happy trading

Stefan


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## stefan (5 January 2005)

> Compounding is something that few people understand.



Obi, that's very true. The power of compounded interest is certainly something most people ignore. But I think that's because they don't live for tomorrow. They live life today and don't give a sh*t about tomorrow. Compounding is something that goes hand in hand with time and in today's world it would appear that time is a rare commodity. Everything is about NOW. Who cares what happens in 10 years time? 

So far this mentality didn't cause any trouble. It is however clear that at some stage it will created quite a lot of unhappy people. Compounding is not only a powerful force when it comes to creating wealth, but it also works the other way round. And that's something even less people seem to understand. 

Happy trading

Stefan


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## tech/a (5 January 2005)

obiwan said:
			
		

> in 1998, I visited a board called hotcopper. I guess things don't change much. This site looks slightly more sensible.
> 
> 
> I am amazed that people still expect 10-20% pa real returns on a consistent basis and 50% or such on a leveraged basis.
> ...




tech/a


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## crashy (5 January 2005)

lol how about lease options @ $300k on every apartment for $10k a pop?


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## tech/a (5 January 2005)

Crashy.

Like your thinking.

Fine if you own them,the apartments (Lease options),how about options to purchase buy them (If they were offered and re sell them before settlement).Both risky but some quick returns could be made.

But thats not what I have in mind.


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## clowboy (5 January 2005)

Stefan,

It was a gerneralised statement I admit and one size never fits all, however my coment still stands.  Despite the fact that you are smart with your money and have learned lessons over time you still invest to increase your net disposable income (while many invest to increase thier income and continue to increase their debt levels).

I guess I could rephrase my statement to...

The number one reason people invest is to obtain finacial freedom (which more often than not increases thier disposable income and in turn expenditure)


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## clowboy (5 January 2005)

Stefan,

Sorry I dont know your reasons for investing, I should have said that your investments DO increase your disposable income (at least we would hope so)

My bad


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## Fleeta (5 January 2005)

Obiwan, why are you so cynical about stock picking? Do you honestly believe you cannot beat the market in the long run?

I think you can achieve great return year-on-year with some good stock picking. Sure, last year anyone could make money, of the top 200 stocks, more than 150 went north. Lets say this year the market goes backward 20%. There will still be at least 10 of the top 200 heading north, and some of them with very solid returns. If you can switch into these stocks you can beat the market...all you need is some Tech/a wisdom...


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## stefan (5 January 2005)

clowboy,
Don't get me wrong. I'm not saying that you're wrong. I'm just making a point about the way people spend their money. You're very right in saying that this is what's happening. People are indeed trying to make money so that they can spend more. I just think that this is also the most likely reason why they will end up in a mess.

Happy trading

Stefan


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## tech/a (5 January 2005)

stefan said:
			
		

> clowboy,
> Don't get me wrong. I'm not saying that you're wrong. I'm just making a point about the way people spend their money. You're very right in saying that this is what's happening. People are indeed trying to make money so that they can spend more. I just think that this is also the most likely reason why they will end up in a mess.
> 
> *Ahh spending Money is subject to TIMING as well is it not??
> ...




tech/a


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## Fleeta (5 January 2005)

Of course there is good debt...good debt is when it is used to invest in an asset that has a rate of return higher than the interest rate on the debt.

If you could borrow at 6% and be guarenteed a return of 10% on your investment, you would borrow as much money as you possibly could!


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## clowboy (5 January 2005)

Fleeta,

Interesting comments, this is what (I think) Stefan is talking about.

Over the last few years you basically have been garunted to make 10% a year.

What happens when you have $500,000 in loans costing 6% PA and the 
returns drop down to 2-3% PA or worse still interest rates go up 3-4%.

I done mortage broking for a very short time and two things I learnt are
1) people walk in and the first thing they ask is how much can I borrow?
2) We are very "now" orientated, Mortage insurance is the biggest rip off I can think of when it comes to buying a house but you sell it by simply saying "yes you can save up 20% and come back later (saving yourself 10-20k in insurance premiums) but meanwhile the house will have gone up 50-60k

Still the important thing is to have an exit strategy.  It doesnt matter if the return decreases or the interest rate goes up if you can liqudate the assets and remove the debt......ride the wave for as long as it lasts.


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## stockgod (5 January 2005)

My friend said to me the other day, that isn't Investing "risky" and i turned to him and said it was risky not investing. My point being is that its very hard to get a head in life just by having a great job and income. I know many doctors, accountants and other profesionals who earn 6 figure wages that have nothing, while others who are on a far more modest income with investment properties and on there way to early retierement. I like the fact that my money is working for me while, im working aswell.


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## tech/a (6 January 2005)

clowboy said:
			
		

> Fleeta,
> 
> Interesting comments, this is what (I think) Stefan is talking about.
> 
> ...




tech/a


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## tech/a (6 January 2005)

Fleeta your 100% correct.

So why dont people do it!

(1) They dont have  a way of increasing their investments by over the interest rates plus costs.
(2) Kahunas are lacking.

tech


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## Fleeta (6 January 2005)

Why don't people do it...because they want to be able to sleep at night...

For me (and i'm pretty highly geared with a margin loan close to max and a home loan), the problem is that we were brought up to believe that debt is bad. Pay off your mortgage as soon as you can type stuff...which came out of the early 90s 15%+ interest rates. Times have changed but people don't move on.

Tech/a, I noticed that you said about limiting yourself to BT margin loan stocks. I 'try' to do the same, but why is it that some stocks have lower rates. For example, I have shares in Wilson Leaders, an LIC and BT only offer 45% gearing, but surely it is a less risky prospect than some of the others out there. I don't get how they set their lending ratios. Can anyone shed some light?


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## tech/a (6 January 2005)

Fleeta said:
			
		

> Why don't people do it...because they want to be able to sleep at night...
> 
> For me (and i'm pretty highly geared with a margin loan close to max and a home loan), the problem is that we were brought up to believe that debt is bad. Pay off your mortgage as soon as you can type stuff...which came out of the early 90s 15%+ interest rates. Times have changed but people don't move on.
> 
> ...






tech/a


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## Fleeta (6 January 2005)

You've sold me - I would do exactly that - just need a system that guarentees 35% return like you have. In the meantime I will just cross my fingers that my share portfolio returns are greater than my ML interest...

You should sell your system and make millions! Hang on a minute, if everyone had your system, doesn't that mean that it will no longer work?

Hmmm, without poor people, there are no rich people...


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## crashy (6 January 2005)

I think I speak for everyone here when I say:

*WHATS THE FRIGGIN DEAL WITH ALL THE BOLD AND COLORED TYPE IN EVERY ONE OF YOUR POSTS?!*

HOW ABOUT YOU POST LIKE THE OTHER MERE MORTALS HERE INSTEAD OF ACTING LIKE 'KING ON THRONE'? 

I directed some of my chatroom pals over to this site. Some had already been and said they were not interested because there was a pretentious egotistic loudmouth there (their words, not mine.....dont shoot the messenger) 

hmmmm I thought......wonder who they could be talking about? lol


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## Fleeta (6 January 2005)

I wouldn't say that Tech/a is over the top, just emphasising points.

Sure, the guy has tickets on himself, but how many successful people don't.

As long as its informative, i'll keep tuning in.


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## crashy (6 January 2005)

hilarious

please define "over the top" for us as you understand it, it must be quite a show!


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## RodC (6 January 2005)

Crashy,

You don't speak for me.

I don't have a problem with tech's postings. The colours are just his way of making a point. It obviously works - it got your attention.

Rod.


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## tech/a (6 January 2005)

Crashy

*Im emotionally smashed!!,devastated,crushed*

Any value in the postings(mine) or are they self centered and egotistical?

*Exactly where is it Ive been pumping my own tyres*

I dont talk of any method or push any trading type.
Ive not said my trading method is one that all should use or pushed or even explained it.(Longterm techtrader).
Few actually have the ability to speak from experience and even fewer give back.Most and,its true of here,and many other sites speak from Theory and Hypothesis

My trading records are there for all to see.
If youd like me to fax the titles of property holdings to you or anyone else then glad too just send me your fax no.

Show me where Ive been egotistical other than pointing out the TRUTH which few can handle here as they wouldnt know it if it punched them in the face!----aint that the truth.

Ive not seen any profound words of Economic wisdom from our resident financial advisor--------.Sorry I need to pay for that!
*Im looking forward to you professional critique on the Flaws in the 3% profit thread*.

Im interested in how else this could have been presented.
Seems that a genuine interest in helping others become successful is shunned.
Why dont you lend a hand rather than sitting in Professional judgement!

Over 1000 hits on a few posts has me thinking that perhaps there is some value seen by others.

Im not here to win friends only to make you think.

Oh and with the highlights why not suggest to Joe that they be removed then we will all be in the same boat.You could learn to use them yourself!

*Bluddy Volvo Drivers!*


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## positivecashflow (6 January 2005)

tech/a said:
			
		

> *Bluddy Volvo Drivers!*



ROFL :behead:


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## crashy (6 January 2005)

"Im emotionally smashed!!,devastated,crushed"

although intended as sarcasm (symptom of an egotist)
you clearly are hurt, otherwise you would have ignored it.

"Any value in the postings(mine) or are they self centered and egotistical? "

Nobody said anything about value of posts. Im just asking that you tone them down a bit. Your posts ARE informative, but the conceit is unbearable.



			
				tech/a said:
			
		

> *Exactly where is it Ive been pumping my own tyres*




hmmm lets see, in the last post alone:

"My trading records are there for all to see.
If youd like me to fax the titles of property holdings to you or anyone else then glad too just send me your fax no."

"Show me where Ive been egotistical...."

how about those two sentences for a start!

"I dont talk of any method or push any trading type.
Ive not said my trading method is one that all should use or pushed or even explained it.(Longterm techtrader)."

is that a joke?

"Ive not seen any profound words of Economic wisdom from our resident financial advisor--------.Sorry I need to pay for that!"

oh well I guess I have been wasting my time. I have posted nothing of value? 

"*Im looking forward to you professional critique on the Flaws in the 3% profit thread*."

professional? where? that statement smacks of conceit. translation: "it was so great you cant even fault it"

"Im interested in how else this could have been presented."

how about with a little less "I know everything and you know nothing" and a bit more "I understand and respect your ideas, this is what I do and have had success with it"

"Seems that a genuine interest in helping others become successful is shunned."

and what would chest beating look like I wonder?

"Why dont you lend a hand rather than sitting in Professional judgement!"

theres that word again. Again, I ask, have I posted nothing of value?

"Over 1000 hits on a few posts has me thinking that perhaps there is some value seen by others."

no ego you say? again, nobody said you didnt post anything of value......unlike yourself

"Oh and with the highlights why not suggest to Joe that they be removed then we will all be in the same boat.You could learn to use them yourself!"

strangly, I dont feel the need to stand up on a podium and shout "here ye, here ye, the great Crashy speaks!...look at me, I use colored bold type because Im sooooo much more important and smarter than the rest of you." 

dont you realise that is how you are perceived?

our attitudes and thoughts are subconciously radiated through our speech and writings. Some people see it easily, some dont see it at all, and some dont care as long as they keep benefiting.

Traders are often egotistic, its nothing new.....I know I was when I had a hot streak years ago.....and I know how it rubs people the wrong way, which is why Im telling you to tone it down and find some humility.........


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## tech/a (7 January 2005)

Crashy.

I dont give 2 sheets how Im percieved.

*If you see the way I present things as egotistical then so be it.
It wouldnt matter how it was presented you and a few others would see any presentation from someone "Without Credibility" as egotistical.
The only credentials I have is successful application---which Im happy to verify----ofcourse you see this as chest beating-----Peirce off!!!!*

Constructively critisise the content by all means but leave your personal opinions in your Volvo.

*Who the hell do YOU think YOU are judging ANYONE by the way they present and highlight their postings!!!*


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## stefan (7 January 2005)

One should do some back testing on one's method every now and then to see if it really creates positive expectancy.

Happy trading

Stefan


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## dutchie (7 January 2005)

If you go to a party (life generally) and there is a loud egostistical person dominating a group just move on to the next group ( it is a waste of time criticising others for the flaws that you percieve they may have) .

If you like what they are saying - stay and listen.


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