Compound Interest Investment - Cryptocurrency Exchange Platform

In this series, I plan to delve deeply into a critically important concept in the investment field: compound interest, known in English as “compound interest.” This series will be divided into three articles for detailed explanation. First, the initial article will introduce the basic concept of compound interest to spark everyone’s interest. Next, the second article will explain the key elements of compound interest and its significance in detail. Finally, in the third article, we will demonstrate how to achieve compound growth through specific cases.

In the opening of this series, we will explore the key investment concept of compound interest. The world-renowned investor Warren Buffett has a simple chart showing the effect of compound interest on his desk, which has accompanied him through over half a century of investing. Let’s look at a basic example of compound interest: suppose the initial investment is 10,000 yuan, with an annual return of 5%. After 20 years, the value of this investment will grow to 26,000 yuan; after 40 years, it will increase to 70,000 yuan. If the annual return reaches 10%, after 20 years, the value will be 67,000 yuan, and after 40 years, it will surge to 450,000 yuan. Furthermore, if the annual return is 20%, after 20 years, the value will reach about 380,000 yuan, and after 40 years, it will soar to nearly 15 million yuan.

The secret to successful investing is to leverage the power of compound interest over the long term, just like rolling snowballs. Although the principle of compound interest is not complicated, it is hailed as a miracle. As Einstein said, compound interest is the eighth wonder of the world; its power exceeds most people’s imagination. If you start investing 100,000 yuan at age 18 right after high school graduation, and achieve an annual return of 20%, by the time you retire at 58, this wealth could grow to 150 million yuan.

This process of growing from 100,000 yuan to 150 million yuan does not consider taxes. But if you give up midway and only invest for 20 years, the growth of this wealth will be only 38 times, meaning your 100,000 yuan investment will only increase to 3.8 million yuan, far less than 150 million. This example illustrates the importance of starting early; youth is our greatest advantage. As the saying goes, “The early bird catches the worm,” and starting to invest early is undoubtedly the best strategy.

I do not recommend waiting until age 38 to start thinking about investing, as this will significantly shorten the time for compound interest to work. The wisest approach is to start investing as early as possible, because no one wants to find themselves without enough wealth to enjoy in old age. The earlier you start, the more returns you can gain. This is because, over time, your wealth will grow like a rolling snowball, with the growth rate doubling or even multiplying the total earnings of five or six years in a certain period. Therefore, to achieve significant wealth growth, a sufficiently long period of accumulation is necessary.

In this process, the initial amount of investment is also crucial. If you only have 1 yuan to start with, after 40 years, you might only have 1500 yuan. But if your initial capital is 10,000 yuan, after 40 years, you could have 15 million yuan. Therefore, young people should learn to accumulate seed capital for the future. These seeds don’t need to be many, but they are very important because they represent your future. Just as money can generate more money, hens can lay eggs, and farmers won’t eat the seeds meant for planting next year. Once you eat your seeds, you give up your future.

Young people, when you feel it’s necessary to spend 1,000 yuan to buy a branded outfit, think carefully before paying. What you spend is not just 1,000 yuan; in fact, you sacrifice an opportunity cost worth 1,000 yuan, and you may also lose 1.5 million yuan in the future. Therefore, when considering issues, always think about opportunity cost. If you spend 1,000 yuan on a piece of clothing, it might become worthless in five years. So, will you choose to hold onto the 1.5 million yuan in future value, or keep the clothing that will become trash in five years?

The principle of compound interest is simple: it uses time as a friend, allowing your money to grow while you enjoy life. You can enjoy meaningful things in life, such as traveling, making friends, cultivating hobbies, reading, etc. Let your money work for you, rather than working for money. Don’t waste your most precious life working for others. Therefore, in youth, don’t squander your seed money. If you squander it, you’ll have to spend the rest of your life earning a meager salary, losing true freedom in life—that’s the most tragic.

By now, you may have realized the importance and tremendous power of compound interest. Some might wonder, this principle sounds simple, but is it difficult to practice? In fact, practicing it is not difficult at all.

By the way, a person’s success does not depend on innate talent, ability, or potential, but on how far they are willing to go. From my life experience, only about 10% of people can identify what is truly important in life, and within this group, only 10% will take concrete actions to achieve these important goals. This means that only about 1% of people worldwide truly strive to pursue what they consider important. The other 99% may not know what is most important in their lives, or even if they do, they choose not to work towards it. Among this tiny 1%, only 10% can persevere and do these important things daily. Therefore, in reality, only about 0.1% of people can always maintain their original intentions and discipline, with the will and determination to act on what matters. As a result, the proportion of truly successful people in the world is about one in a thousand. This phenomenon is roughly the same throughout history and across cultures, and it is likely to continue in the future.

I advise you to walk each step carefully, act immediately upon discovering what is important, and keep working hard. Today, we are discussing compound interest, which is an important matter, perhaps even the most crucial. This is the first article; in the next, we will explore the concept of compound interest further, and in the third, through case studies, help you understand more intuitively.

In the previous article, we already discussed the advantages, potential, and underlying principles of compound interest. Many may wonder: is it really difficult to achieve an annual return of 20% and grow wealth 1,500 times in 40 years? In fact, it is not as hard as it seems.

Especially in the early stages with limited capital, as long as you are willing to invest effort in learning, build and expand your circle of competence, actively seek knowledge, conduct in-depth research, strengthen investigations, and communicate with others, achieving a 20% annual return is entirely possible. If you can dedicate one-third of your preparation time for exams to studying and researching investments, success can be expected. Buffett, in his early days with smaller capital, achieved annual returns as high as 60%. However, as his capital grew, opportunities for investment decreased, and his annual return rate also declined accordingly.

Compound interest is a well-known concept, with the specific formula: C = P × (1 + r)^n. In short, it means your total return C is the product of your initial capital P and the quantity (1 + r)^n, where r is the annualized return rate (for example, 20%), and n is the number of years invested. In this formula, initial capital P, annual return r, and time n are three key variables. Although their contributions to wealth growth differ, each is very important.

If math formulas seem too complex, you can compare it to rolling a snowball, which is known to grow larger as it rolls. To keep the snowball growing, you need a long slope. With each turn, the radius of the snowball increases proportionally, making its growth exponential. Therefore, the final size of the snowball (asset) depends on three factors: the initial size (initial capital), the thickness of the snow layer (profit), and perhaps most importantly, the length of the slope (investment time).

This analogy vividly illustrates the concept of compound interest: the key to a snowball’s growth is twofold—one is the thickness of the snow layer, and the other is the length of the slope. The initial size of the snowball also matters but is less critical than these two.

The concept of snow layer thickness emphasizes that the annual return should be reasonable and substantial, not excessively high. Pursuing overly high returns often involves higher risks, which can lead to significant financial losses. If a deep loss occurs, it will seriously threaten the realization of the long-term compound interest goal, as deep losses become a major obstacle to achieving sustained growth.

Second, the return rate should not only be high enough but also sustainable and ideally capable of continuous growth. This means avoiding companies with fleeting profits or those in industries with cyclical fluctuations that cause unstable earnings. Therefore, companies or industries that can provide stable and increasing profits year after year are the best investment choices. For example, Coca-Cola’s earnings are relatively stable because the consumer goods industry is less cyclical. The pharmaceutical industry is similar; its business cycle is not strong, and profits are relatively stable, making it an ideal investment target. Of course, sustainability also includes other factors, such as the company’s moat, long-term stable management team, and inherent advantages. Moutai is a typical example.

In timing the market, if you can buy during a market crash—for instance, if a stock that was originally priced at 1 yuan per share drops to 0.5 yuan—then with the same amount of capital, you can buy twice as many shares. This effectively doubles your initial capital, leading to exponential growth in future returns. However, this growth is linear, unlike the exponential growth brought by returns and investment time, which has a more lasting and significant impact on asset appreciation. It’s like the snowball analogy: the thickness of the snow and the length of the slope determine the final size of the snowball. While the initial size of the snowball also matters, its contribution is linear.

A company’s value is mainly determined by two aspects: one is the company’s inherent strength. To identify which companies are worth investing in, you need to invest time in learning and building your circle of competence. The circle of competence refers to a specific field where your knowledge depth and expertise surpass most people, giving you a broader and deeper understanding than the majority. Without relevant knowledge and skills, success in any industry will be difficult to achieve. Learning is the key to success; lacking the desire to learn, even God cannot help you. Therefore, I suggest young people maintain the perseverance and spirit they had during the college entrance exam, even if only half as much effort, as this is the key to seizing opportunities in life.

The experience of the college entrance exam teaches us that even putting in the same effort as others does not guarantee admission to an ideal university; likewise, attending a prestigious university does not necessarily mean future success. I have seen many graduates from top schools who did not achieve extraordinary accomplishments, which raises a question: is the effort worth it? My point is not to ignore the importance of the college entrance exam but to emphasize that the key is to put effort into the right places. For each person, when a real opportunity appears, it is crucial to recognize and cherish it. Once you find your own opportunity, you should seize it without hesitation.

Investment is a beneficial way to plan for life, and the time and effort invested will ultimately pay off. Compared to other methods, investment can bring wealth growth and improve quality of life. While attending top universities may increase employment opportunities, it still often means working for others. Conversely, investment makes your capital work for you, allowing you to enjoy a freer life. These two paths are fundamentally different.

Another key factor determining a company’s value is the length of the snow slope—meaning the company’s sustainability. An investment-worthy company should have a long-term prospect. This means the company should maintain a stable and reliable business model in its industry or product line, avoiding situations where sales are booming today but sharply decline tomorrow, or the industry faces sudden extinction. Factors influencing the sustainability of profits include product stability, inherent competitive advantages (like a strong moat), cost advantages, patents, brand strength, and ongoing market expansion. For example, Buffett invested in Coca-Cola because he saw over a hundred years of stable sales growth and huge potential for overseas expansion. This combination of continuous profitability and growth potential leads to sustained increases in return on equity and stable profits, reducing cyclical volatility. That’s why Buffett chose to invest in Coca-Cola.

Additionally, investors need patience and the ability to hold stocks long-term. When a company’s value exceeds its price, they should have the courage to hold firmly. This value-oriented, long-term perspective is a key to successful investing.

During market volatility, patience and resolve are especially important. Only by being willing to buy decisively during downturns and holding or increasing your position can you seize investment opportunities without wavering. However, such confidence and holding decisions must be based on a solid foundation—deep understanding and thorough research of the invested companies, i.e., building your circle of competence. Without sufficient knowledge of the company, key decisions can be shaky. Even if the decision is ultimately correct, shallow understanding and weak foundation make it difficult for the stock to achieve expected returns. Therefore, confidence in long-term holding fundamentally depends on a deep understanding of the company; only then can you truly maintain confidence in your holdings. If your ability circle is shallow, then the so-called confidence in long-term holding is superficial. In summary, the sustainability and certainty of a company’s profits, combined with the investor’s patience and resolve, are crucial for success.

These contents may seem straightforward and simple—indeed, the great way is very simple. Whether it’s the circle of competence, margin of safety, or moat, Buffett and Munger have already summarized and shared these concepts openly. I greatly admire them because such people who contribute and speak out are very rare. They not only earn huge wealth themselves but also selflessly share how others can make money. Conversely, most people in the world earn money but do not tell others how.

Near my home, there is a “Renaissance Hedge Fund,” claimed to be the most powerful company, with an annual return of 40% to 45%. It has hundreds of employees, and there is no sign at the entrance. They quietly make big money, not wanting their secrets to be discovered. Therefore, people like Buffett and Munger, who are willing to share their valuable secrets, are rare, and we should cherish and learn from them deeply. Although it might only cost a few tens of yuan to buy their books, the investment knowledge inside is the real path; these secrets are not mysterious but are definitely useful.

A good book is actually read by countless people, but each person gains very different insights. It’s like in a school, where a teacher teaches a course to forty or fifty students in the same classroom with the same textbook, yet each student’s grades can vary greatly. This does not mean the teaching theory is wrong, or the teacher has issues, or the textbook is flawed. The bigger influence comes from each student’s comprehension ability, especially differences in effort. Willpower is the driving force behind action, and it is vital for realizing wishes.

Therefore, I hope everyone can seriously recall the spirit of the college entrance exam, deeply experience the fun and wisdom within it. I hope it can be understood by those with fate and become the one in the thousandth I mentioned earlier. When you discover what is important, you must move forward bravely, act with determination, and persist every day.

I will demonstrate how to effectively implement a compound interest investment strategy by combining key concepts from Buffett’s value investing principles—margin of safety, Mr. Market, and moat—and supplement with specific investment cases.

One of Buffett’s investment models is his investment in Coca-Cola. Between 1988 and 1989, he invested in Coca-Cola stock through Berkshire Hathaway, with the investment amount accounting for about one-third of the total funds of the company. At that time, Coca-Cola’s stock price reached a historic high, showing that value investing does not always mean buying at a low price. Buffett’s high purchase price was based on his judgment of Coca-Cola’s intrinsic value, not just comparing it to past prices. At that time, Coca-Cola’s P/E ratio was 15, which was 30% higher than the market average.

Buffett was willing to buy Coca-Cola at a high price because of his in-depth assessment of the company’s value. He believed its value reached 38 billion USD, far exceeding the market’s general estimate of 15 billion USD. This valuation difference stemmed from Buffett’s many years of experience in insurance, banking, and consumer goods (especially beverage industry). His deep ability circle in the consumer goods sector allowed him to decide to buy even when the stock price was at a high point. Ten years later, Coca-Cola’s stock price had increased more than tenfold, plus annual dividends, resulting in Buffett’s annual return reaching 32%.

From this case, we can conclude that an individual’s circle of competence has a decisive impact on their investment results. Building a circle of competence does not require extraordinary intelligence but involves investing time and effort to study a specific industry deeply, so that you understand it better than most others. By accumulating this expertise, you can buy when others hesitate and hold when others rush to sell, thus making profits. Expanding your circle of competence boosts your confidence and decisiveness, leading to more investment success.

Some may say Buffett is a “stock god,” and ordinary investors find it hard to reach his level, but through Google, we see that ordinary investors can also use Mr. Market to capture long-term stable opportunities and achieve 20% annualized returns. For example, during 2008–2009, Google’s stock price dropped to about $200 per share during the market plunge. If investors dared to gradually buy during this period and held until 2019, they would see Google’s stock price rise to about $1500 per share.

This means an average annual return of 20%, and the company’s profits still grow at about 15% annually. The compound growth brings very attractive annual returns. Google can be considered a continuous money-making machine, though not forever, but definitely a long-term steady income generator, similar to Apple and others. Therefore, there are no secrets to compound investing; all opportunities are right in front of you. Although great companies may be around us, not every company that appears is great.

The power of compound interest is significant. Going back to Buffett’s purchase of Coca-Cola at $2.50 per share in 1989, considering stock splits, by 2011, the dividend per share had grown to $3.50. This means that the dividends from stocks bought 22 years ago now exceed 1.5 times the original investment, and this dividend income continues to grow annually. This investment has essentially become a continuous money-making machine with astonishing returns.

Once you have chosen an ideal target stock, the next question is how to use Mr. Market’s emotional fluctuations to buy at lower prices. If the current price is not suitable, patience is needed to wait for market crashes—a key strategy for ordinary investors. If your circle of competence is not strong enough, at least you need patience and courage to wait for market corrections. Market crashes may be delayed but will not be absent. Even the best companies will experience stock price plunges, like Moutai in 2013 when its price fell to very low levels, with a P/E ratio just over 10. Now, Moutai’s price has at least increased tenfold. If you could buy this great company at a low price back then, it would not only provide a safety margin, lower purchase cost, and reduced risk but also give you a perpetual money-making machine.

Moutai may always have consumers—unless the Zhaoqing River dries up. The low purchase price at that time would bring long-term profits. Therefore, once you select an ideal stock, learn to hold it patiently, just like Buffett holding Coca-Cola for the long term, allowing dividends and profits to grow steadily, even achieving annual returns higher than the purchase price. This is due to excellent companies continuously expanding, profits gradually increasing, and sustained compound growth. The initial purchase cost is fixed; over time, the only variable is the increasing profits. As long as you hold it, the cost remains the same as when you bought it, but profits will grow, and this growth is nonlinear—exponential.

The core investment strategy relies on your circle of competence: find a high-quality company, patiently wait for market crashes, buy decisively, and have confidence in the company. After buying, hold long-term. Of course, the prerequisite is to choose a good company with low valuation and growth potential, use Mr. Market’s opportunities, combine with your circle of competence for stock selection, and make friends with time, letting time’s power of compound interest help you accumulate wealth.

The emphasis here is on patience—don’t rush. Spend your time traveling, playing mahjong, reading with friends. Investment is the best way to work in the world—such a relaxed activity that you might never need to retire. No need to stare at charts all day like speculators; that’s a complete reversal of priorities and is harmful to health. Greed will cost you more money. In the initial stage, spend time expanding your circle of competence, accumulating capital, researching companies, waiting for market dips, and steadfastly buying and holding, enjoying life. That’s the benefit of compound interest and value investing, and also Buffett’s secret. So I suggest young people consider carefully and take action—persist every day and become that one in a thousand.

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