Mental Model: Compound interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.” ― Charlie Munger

“We’ve going to compound it at a reasonable rate without taking unreasonable risk or using leverage. If we can’t do this, then that’s just too damn hard.” ― Charlie Munger

Back in 1963 in his letter to partners Warren Buffett wrote about the joys of compounding explaining the difference of compounding depending on the level of growth over different time periods – see image below. Click on image to enlarge.

CompInt

In the Snowball Warren said Anything times zero is zero.” So, the lesson here is to always remember Warren’s advice Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

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