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Today I'll be sharing Charlie Munger’s first rule of compounding, my formula for successful compounding, and some mistakes I’ve made along the way.

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Now for today’s piece:

Don't Break Munger's First Rule Of Compounding

Highlights

Charlie Munger’s First Rule Of Compounding

This quote from the 99-year-old Vice Chairman is one of my golden rules as an investor.

Compounding is your most powerful tool as an investor, it turns small investments into big winners.

My basic formula for successful compounding in investing is this:

Compounding = Investment + Time + Patience + Remaining Invested

Each one of these pieces is necessary to get the most out of compounding.

Let’s explore each piece in depth:

Investment

If you have no money invested, it's impossible to compound.

Even $1 invested can compound, but you can’t compound from $0.

It's also important to start investing as early as possible.

The longer you have your money invested, the longer time it has to compound.

Even if you start investing early and don’t contribute consistently, you can still have solid results.

Check out this graphic explaining the importance of investing early:

It’s kind of mind-blowing to see Investor 1 only invest for 10 years and still outperform Investor 2, even though Investor 2 invests for 20 additional years.

That’s the power of starting early.

Time

Time is crucial for the success of compounding.

If you read last week’s issue, you saw how 99% of Warren Buffett’s wealth came after his 50th birthday.

Compounding works best when you give it time to do its thing, and the results are best towards the end.

For example, $1,000 invested and compounding at 10% becomes $1,610.51 in year 5, a 61.1% increase.

If the 10% compounding continues, in year 40 that $1,000 is now worth $45,259.26.

In year 45 the investment would grow to $72,890.48. The same 10% growth is putting up insane growth!

It’s also worth noting that these calculations are based off of a one-time investment of $1,000. If you contribute more funds along the way, it’ll only speed up your compounding.

Patience

Investors without patience will not be able to reap the benefits of compounding.

I’ve experienced this firsthand.

Back in early 2021, I bought shares of Exxon-Mobil (NYSE: XOM) for $54.47.

Quickly, the stock rebounded and I sold half my position at $79.23 per share, a quick 45.5% gain.

But the run-up didn’t stop there.

Exxon-Mobil continued its hot streak all throughout 2022, reaching a high of $119.63.

By selling prematurely, I missed out on tons of gains.

But who knows if that $119.63 peak was the top?

Oil is a very scarce and extremely critical resource, and short supply might drive up the price of Exxon-Mobil’s shares to even higher prices.

In 10 or so years, the price of Exxon-Mobil shares could dwarf that 2022 peak.

In addition, I also missed out on the dividends and dividend growth the shares I sold would’ve given me.

My takeaway from this Exxon-Mobil miscue is to be patient, invest for the long term, and only sell if my investing thesis becomes broken.

Remaining Invested

You can have money, time, and patience on your side, but if you don’t remain invested it becomes much harder to compound for the long term.

As you can see in the above graphic, it doesn’t take a lot to affect your returns.

Just by missing the 10 best days from 2002-2021, your returns were nearly cut in half.

There are a few ways to increase the probability you remain invested and help protect against decisions you may regret:

• Develop an investing thesis — This will help you monitor your holdings and see if you’re on track.

• Diversify — If one sector dramatically falls, having investments spread across other sectors should help keep your portfolio from losing too much in value.

• Prepare for volatility — Buying stocks that fit your risk profile will help you remain invested. You can plan for how volatile they’ll be and are less likely to sell when big moves occur in the market.

• Ignore the noise — There have been many reasons to sell, yet the market has recovered and gone higher every time

Final Thoughts

Albert Einstein once called compounding, “The 8th wonder of the world.”

It's one of the most powerful forces in the universe, and it's the biggest weapon in a dividend growth investor’s arsenal.

In my opinion, the best way to take advantage of compounding as a dividend growth investor is to have:

• Money Invested (preferably as soon as possible)

• Time (to allow for maximum compounding)

• Patience (to allow for your investments to grow their dividends for the long term)

And to:

• Remain Invested (It's hard to time the market, you’ll likely compound better if you remain invested)

In my time as an investor, I’ve made some mistakes that have interrupted compounding.

I sold shares too early, I spent way too much time and energy day-trading, and I didn’t invest for the long term.

I hope this guide helps you avoid the mistakes I’ve made.

Happy compounding!

Sincerely,

Dr. “Don’t Interrupt The Compounding” Dividend

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Links And Memes

Here are some links to some of the best stuff I saw this week:

• A breakdown of investor Nick Sleep’s 3-stock portfolio — You gotta have balls of steel to only hold 3 stocks 🤯(@InvestInAssets)

• Shohei Ohtani hitting nuclear bombs — Is anyone else watching the World Baseball Classic? (Ben Verlander)

• One more from the World Baseball Classic — Clutch af grand slam from Trea Turner (Playoff Tanaka)

• An iceberg flipping over — I didn’t know different color icebergs meant different ages (How Things Work)

And of course, some memes:

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